STATE OF CALIFORNIA FRANCHISE TAX BOARD California Forms & Instructions 565 This booklet contains: Form 565, Partnership Return of Income FTB 3885P, Depreciation and Amortization FTB 3538, Payment for Automatic Extension for LPs, LLPs, and REMICs Schedule D (565), Capital Gain or Loss Schedule K-1 (565), Partner’s Share of Income, Deductions, Credits, etc. 2007 Partnership Tax Booklet Members of the Franchise Tax Board John Chiang, Chair Betty T. Yee, Member Michael C. Genest, Member File 565 K-1s via CD or Diskette. Put up to 300,000+ K-1s on CD or 12,000 K-1s on a diskette. PLACE ADDRESS LABEL HERE For more information regarding business e-file, see page 2 or go to our Website at www.ftb.ca.gov and search for business e-file.
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STATE OF CALIFORNIAFRANCHISE TAX BOARD
CaliforniaForms & Instructions
565
This booklet contains:Form 565, Partnership Return of Income
FTB 3885P, Depreciation and Amortization
FTB 3538, Payment for Automatic Extension for LPs, LLPs, and REMICs
Schedule D (565), Capital Gain or Loss
Schedule K-1 (565), Partner’s Share of Income, Deductions, Credits, etc.
2007Partnership Tax Booklet
Members of the Franchise Tax Board
John Chiang, ChairBetty T. Yee, Member
Michael C. Genest, Member
File 565 K-1s via CD or Diskette.Put up to 300,000+ K-1s on CD or
12,000 K-1s on a diskette.
PLAC
E AD
DR
ESS
LABE
L H
ERE
For more information regarding business e-file, see page 2 or go to our Website at www.ftb.ca.gov and search for business e-file.
Business e-fileBusiness e-file began in January of 2006, allowing business taxpayers to e-file the Form 100, Corporation Franchise or Income Tax Return (except for Combined Reports) for the first time. In January 2007, the following additional return types were added:• Form 565, Partnership Return of Income• Form 568, Limited Liability Company Return of Income• Form 100S, S Corporation Franchise or Income Tax Return
In June 2008, the Franchise Tax Board (FTB) will add the ability to e-file Combined Reports along with Form 100W, Corporation Franchise or Income Tax Return - Water’s-Edge Filers.For more information, go to our Website at www.ftb.ca.gov and search for business e-file.
Form 565 Booklet 2007 Page �
2007 Instructions for Form 565, Partnership Return of IncomeReferences in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2005, and to the California Revenue and Taxation Code (R&TC).
What’s NewRegistered Domestic Partners (RDP)Effective for taxable years beginning on or after January 1, 2007, RDPs under California law must file their California income tax returns using either the married/RDP filing jointly or married/RDP filing separately filing status. RDPs will have the same legal benefits, protections, and responsibilities as married couples unless otherwise specified.If you entered into in a same sex legal union in another state, other than a marriage, and that union has been determined to be substantially equivalent to a California registered domestic partnership, effective for taxable years beginning on or after January 1, 2007, you are required to file a California income tax return using either the married/RDP filing jointly or married/RDP filing separately filing status. For more information on what states have legal unions that are considered substantially equivalent, go to our Website at www.ftb.ca.gov and search for RDP. For purposes of California income tax, references to a spouse, a husband, or a wife also refer to a California Registered Domestic Partner (RDP), unless otherwise specified. When we use the initials (RDP) they refer to both a California Registered Domestic “Partner” and a California Registered Domestic “Partnership,” as applicable. For more information on RDPs, get FTB Pub. 737, Tax Information for Registered Domestic Partners.Round Cents to Dollars Beginning with the 2007 tax forms, round cents to the nearest whole dollar. For example, round $50.50 up to $51 or round $25.49 down to $25. If you do not round, FTB will disregard the cents. This change helps process your returns quickly and accurately.Revised Schedule K and Schedule K-1The California Schedule K (565) and Schedule K-1 (565) line items have been revised to be in a similar format with the federal Schedule K (1065) and K-1 (1065). Refer to the Schedule K Federal/State Line References chart, in this booklet, and Specific Line Instructions when completing California Schedule K (565) and Schedule K-1(565).ConformityFor updates regarding the following federal act, go to our Website at www.ftb.ca.gov and search for conformity.• Small Business and Work Opportunity Tax Act of 2007Limited Partnership Act of �008For taxable years beginning on or after January 1, 2008, domestic limited partnerships whose certificates of limited partnership have been canceled may revive by filing a certificate of revival with the California Secretary of State. The certificate of revival must include written confirmation by the Franchise Tax Board that all taxes, interest, and penalties have been paid for all taxable years through the date of revival. This includes the taxable years after the limited partnership canceled.IRC 409A Additional Taxes for Discounted Stock Options and Stock Appreciation RightsFor those employees who exercised certain discounted stock options or stock appreciation rights in 2006 and whose employer participated in the Franchise Tax Board’s 2007 Compliance Resolution Program described in FTB Notice 2007-1 and paid the additional IRC Section 409A taxes on behalf of their employees, the additional taxes paid by the employer should be included as compensation in the employee’s 2007 Form W-2.El Dorado and Southern California WildfiresFor tax treatment information for victims of the wildfires that occurred in El Dorado, Santa Barbara, Ventura, Los Angeles, San Bernardino, Orange, Riverside, and San Diego counties, get FTB Pub. 1034, How to Claim a State Tax Deduction for Your Disaster Loss. January �007, Freezing ConditionsFor tax treatment information for victims of the January 2007, freeze that occurred in El Dorado, Fresno, Imperial, Kern, Kings, Madera, Merced, Monterey, Riverside, San Bernardino, San Diego, San Luis
Obispo, Santa Barbara, Santa Clara, Stanislaus, Tulare, Ventura, and Yuba Counties, get FTB Pub. 1034, How to Claim a State Tax Deduction for Your Disaster Loss.
General InformationA Important InformationIn general, California law conforms to the Internal Revenue Code (IRC) as of January 2005. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to our Website at www.ftb.ca.gov and search for conformity. Additional information can be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540 or 540NR), and the Business Entity tax booklets.The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the tax booklets. Taxpayers should not consider the tax booklets as authoritative law.R&TC Sections 17024.5 and 23051.5 have been amended to clarify that, unless otherwise expressly disallowed, federal elections made before a taxpayer becomes a California taxpayer are binding for California tax purposes.Form 565, Side 1, line 4 through line 12 have been updated to reflect the separation of the lines to report gains and losses. Net amounts are no longer reported on these lines. The lines that included repairs, rent, and taxes have been eliminated and will now be included in line 21 (Other Deductions).e-filing – In January 2007, the Franchise Tax Board (FTB) began offering e-filing for partnerships filing Form 565, California Partnership Return of Income, and certain accompanying forms and schedules. Check with the software provider to see if the partnership can e-file.Reconciliation of Income – For taxable years beginning on or after January 1, 2006, the Internal Revenue Service (IRS) requires certain partnerships to complete Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships, instead of Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return. For California purposes, the partnerships must complete the California Schedule M-1, and attach either of the following:• A copy of the Schedule M-3 (Form 1065) and related attachments to
the Partnership Return of Income. • A complete copy of the federal return. FTB will accept the Schedule M-3 (Form 1065) in a spreadsheet format if more convenient.Dissolving or Cancelling/Tax Clearance Certificate ProcessFor taxable years beginning on or after January 1, 2006, Limited Partnerships (LP) or Limited Liability Partnerships (LLP) will not be required to obtain a Tax Clearance Certificate prior to the dissolution or cancellation of the LP or LLP. For more information, see General Information P, Cancelling a Limited Partnership or Limited Liability Partnership.California Use TaxIf your partnership made purchases outside California and used them in California, it may owe California use tax. The partnership should report and pay the tax on the California Franchise or Income Tax Return unless the use tax has been previously reported to the State Board of Equalization. See page 9, Additional Information “California Use Tax” for more information.
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California Tax Information on the InternetYou can download, view, and print California tax forms and publications from our Website at www.ftb.ca.gov.Federal Tax Information on the InternetThe IRS also has federal forms and publications available to download, view, and print. The IRS’s Website is www.irs.gov.State Agencies’ WebsitesAccess other state agencies’ Websites through the State Agencies Directory on California’s Website at www.ca.gov.Joint Agency WebsiteFor additional business tax information, go to the California Tax Service Center Website, sponsored by the Board of Equalization (BOE), Employment Development Department (EDD), FTB, and IRS. The Joint Agency Website is located at www.taxes.ca.gov. Providing California and Federal ReturnsThe FTB may request a copy of California or federal returns that are subject to or related to a federal examination. Generally, the California statute of limitations is four years from the due date of the return or from the date filed, whichever is later. However, the statute is extended in situations where an individual or a business entity is under examination by the IRS. For additional information concerning the extended statute of limitation due to a federal examination, see General Information J, Amended Return.The FTB recommends keeping copies of returns and records that verify income, deductions, adjustments, or credits reported, for at least the minimum time required under the statute of limitations. However, some records should be kept much longer. For example, partners should keep records substantiating their basis in a partnership and property owners should keep records to figure the basis of property. Substitute Schedule K-1 (565)The FTB recommends filing paperless substitute Schedules K-1 (565), Partner’s Share of Income, Deductions, Credits, etc. Since software is most often used to prepare Form 565 and Schedules K-1 (565), you may already have the information needed to prepare paperless Schedules K-1 (565). Once the information is in a database or spreadsheet, it’s easy to transfer to the required record layout and then save it to a CD or diskette.Get approval from the FTB to use substitute Schedules K-1 (565), if the partnership:• Wants to use paperless Schedules K-1 (565).• Does not use the official California Schedule K-1 (565) prepared by
the FTB.• Does not use a software program with an FTB-approved
Schedule K-1 (565).The FTB does not accept federal Schedules K-1 (1065) as a substitute schedule.For more information, see General Information S, Substitute Schedules.Federal/State DifferencesCalifornia tax law generally conforms to federal tax law in the area of partnerships (IRC Subchapter K – Partners and Partnerships). However, there are some differences:• An $800 annual tax is generally imposed on limited partnerships
(LPs), limited liability companies (LLCs) classified as partnerships for tax purposes, limited liability partnerships (LLPs), and real estate mortgage investment conduits (REMICs) that are partnerships or are classified as partnerships for tax purposes.
• Distributions to certain nonresident partners are subject to withholding for California tax.
• A deduction for taxes paid to other states is not allowed.• California follows federal law by requiring partnerships to use a
required taxable year. However, California does not conform to the federal required payment provision.
• California law has specific provisions concerning the distributive share of partnership taxable income allocable to California, with special apportionment formulas for professional partnerships.
• California law modifies the federal definitions for unrealized receivables and substantially appreciated inventory items.
• California does not conform to the electing large partnership provisions.• Partnerships can electronically file their California partnership returns.
Also, partnerships can file Schedules K-1 (565) via CD or diskette. (See General Information S, Substitute Schedules, for more information.)
• California has not conformed to the provisions relating to the Tax Equity and Fiscal Responsibility Act (TEFRA).
• California has not adopted the federal definition of small partnerships, as defined in IRC Section 6231.
This list is not intended to be all-inclusive for the federal and state differences. For additional information, consult California’s R&TC.Conversion to a Limited Liability Company (LLC)A partnership that converts to an LLC during the year must file two California returns. Even if the partners/members and the business operations remain the same, the partnership should file Form 565, Partnership Return of Income, for the beginning of the year to the date of change. For the remainder of the year, the newly converted LLC would file Form 568, Limited Liability Company Return of Income. See General Information I, Accounting Periods, for further instructions.Revised Uniform Partnership Act (RUPA)California has enacted RUPA which applies to partnerships formed after January 1, 1997. RUPA applies to all partnerships after January 1, 1999. RUPA governs the formation, operation, and liquidation of partnerships in California. However, the R&TC governs the taxation of partnerships doing business in California. For partnerships operating under the newest version of the Uniform Limited Partnership Act of 2008, see Limited Partnership Act of 2008 under “What’s New.”Tax ShelterIf the partnership was involved in a reportable transaction, including a listed transaction, the partnership may have a disclosure requirement. Attach the federal Form 8886 to the back of the California return along with any other supporting schedules. If this is the first time the reportable transaction is disclosed on the return, send a duplicate copy of the federal Form 8886 to the address below. The FTB may impose penalties if the partnership fails to file federal Form 8886, or any other required information. ATSU 398 MS: F385
FRANCHISE TAX BOARD PO BOX 1673 SACRAMENTO CA 95812-9900
For more information go to our Website at www.ftb.ca.gov and search for tax shelter.Claim of RightIf the partnership had to repay an amount that was included in income in an earlier year, under a claim of right, the partnership may be able to deduct the amount repaid from its income for the year in which it was repaid. Or, if the amount the partnership repaid is more than $3,000, the partnership may be able to take a credit against its tax for the year in which it was repaid. For more information, see the Repayment section of federal Publication 525, Taxable and Nontaxable Income.Punitive Damage AwardsFor court actions filed after August 16, 2004, and the final determination rendered by June 30, 2006, the tax treatment of punitive damages differs between federal and State. For California purposes, the amount of punitive damages paid to the director of the Department of Finance shall be excluded from income and the attorney fees associated with the amount paid are not deductible.
B PurposeForm 565 is an information return for calendar year 2007 or fiscal years beginning in 2007. Use Form 565 to report income, deductions, gains, losses, etc., from the operation of a partnership.
Form 565 Booklet 2007 Page 5
C DefinitionsLimited Partnership (LP)A partnership formed by two or more persons under the laws of this state and having one or more general partners and one or more limited partners. Limited partnerships are required to register with the California Secretary of State (California SOS).Limited Liability Partnership (LLP)California law authorizes the formation of LLPs with activities limited to either the practice of public accountancy, law, architecture, and related services. California also recognizes out-of-state LLPs doing business in California.An LLP is a partnership, other than a limited partnership, that has a Certificate of Registration on file with the California SOS as described in Corporation Code Section 16951.Real Estate Mortgage Investment Conduit (REMIC)A special tax vehicle for entities that issue multiple classes of investor interests backed by a fixed pool of mortgages.For additional information get the instructions for federal Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return, federal Publication 938, Real Estate Mortgage Investment Conduits (REMICs) Reporting Information, and Other Collateralized Debt Obligations (CDO). Additional DefinitionsFor definitions of a partnership, general partner, limited partner, nonrecourse loans, apportionment, unitary, etc., see the Partner’s Instructions for the Schedule K-1 (565) and the instructions for federal Form 1065, U.S. Partnership Return of Income.
D Who Must FileA partnership (including REMICs classified as partnerships) that engages in a trade or business in California or has income from a California source must file Form 565. Regardless of where the trade or business of the partnership is conducted, a partnership is considered to be doing business in California if any of its partners (general or limited) or other agents are conducting business in California on behalf of the partnership.An electing large partnership that completes federal Form 1065-B, U.S. Return of Income for Electing Large Partnerships, must still use Form 565. California does not conform to the electing large partnership provisions.Limited partnerships and LLPs (both foreign and domestic) doing business in California, that have a certificate on file, or are registered with the California SOS (whether or not doing business in California) must file a return and pay the $800 annual tax.The limited partnership is still required to file if it is registered in California and both of the following apply:• It is not doing business in California.• It does not have California source income.However, if the limited partnership meets both of the above provisions, then it may be eligible for the reduced filing program. The limited partnership’s filing requirement will be satisfied by:1. Completing Form 565 with all supplemental schedules.2. Completing and attaching California Schedules K-1 (565) for partners
with California addresses.3. Writing “SB 1106 Filing” in red at the top of Form 565, Side 1.4. Entering the total number of partners in Question K, Side 2, of
Form 565.Religious and apostolic organizations that are exempt from income tax under R&TC Section 23701k are not required to file Form 565. However, Form 565 should be prepared and attached to Form 199, California Exempt Organization Annual Information Return.LLCs may be classified for tax purposes as a partnership, a corporation, or a disregarded entity (see General Information R, Check-the-Box Regulations). The LLC must file the appropriate California return for its classification.
Every LLC classified as a partnership for tax purposes must file Form 568 if any of the following apply:• Doing business in California.• Organized in California.• Organized in another state or foreign country, but registered with the
California SOS.Nonregistered foreign LLCs that are not doing business, but are deriving income from California or filing to report an election on behalf of a California resident, must file Form 565. Nonregistered foreign LLCs that are members of an LLC doing business in California or general partners in a limited partnership doing business in California are considered to be doing business in California and should file Form 568.Certain publicly traded partnerships (PTP) treated as corporations under IRC Section 7704 must file Form 100, California Corporation Franchise or Income Tax Return.A qualifying syndicate, pool, joint venture, or similar organization may elect under IRC Section 761(a) (which California follows) not to be treated as a partnership for state income tax purposes and will not be required to file Form 565 except for the year of election. If Form 565 is filed, a copy of the operating agreement and all amendments must be attached to the return, unless a copy has been previously filed with the FTB.Partnerships, except LPs and LLPs, organized or registered in California, that do not do business in California and that do not receive income from California sources are not required to file Form 565. However, resident partners of a nonresident partnership may be required to furnish a copy of federal Form 1065.
E When and Where to FileA partnership must file Form 565 and pay the $800 annual tax (if required) by the 15th day of the 4th month (fiscal year) or April 15, 2008 (calendar year), following the close of its taxable year.PAYMENTS• Mail Form 565 with payment (LPs, LLPs, and REMICs only) to: FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0601• E-filed returns: Mail form FTB 3587, Payment Voucher for LP, LLP
and REMIC e-filed Returns with payment to: FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0531Make the check or money order payable to the “Franchise Tax Board.” Write the partnership’s federal employer identification number (FEIN), California SOS file number and “2007 Form 565” on the check or money order.Note: California SOS file number must begin with “19” or “20.”Make all checks or money orders payable in U.S. dollars and drawn against a U.S. financial institution.REFUNDS• Mail Form 565 requesting a refund to: FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0602RETURN WITHOUT PAYMENT or PAID by EFT • Mail Form 565 without a payment or paid by EFT to: FRANCHISE TAX BOARD PO BOX 942857 SACRAMENTO CA 94257-0600
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ExtensionsCalifornia does not require the filing of written extensions. If a partnership needs more time to file Form 565 by the return’s due date, the partnership is granted an automatic six month extension.However, the automatic extension does not extend the time to pay the $800 annual tax.If the partnership is filing the return under extension, see form FTB 3538, Payment for Automatic Extension for LPs, LLPs, and REMICs, included in this booklet. Send form FTB 3538 and the tax payment to the FTB by the 15th day of the 4th month following the close of the taxable year.Private Delivery ServicesCalifornia law conforms to federal law regarding the use of certain designated private delivery services to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. See the instructions for federal Form 1065 for a list of designated delivery services. If a private delivery service is used, address the return to: FRANCHISE TAX BOARD
SACRAMENTO CA 95827Caution: Private delivery services cannot deliver items to PO boxes. If you will be using one of these services to mail any item to the FTB, DO NOT use an FTB PO box.
F Annual TaxThe $800 annual tax applies to all LLCs, LPs, LLPs, and REMICs, if any of the following apply to the entity:• It is doing business in California. • It is registered in California. • It is organized in California. This tax cannot be deducted as an expense by the partnership or deducted from the partner’s distributive share.An LP that is filing ONLY to report California source income is NOT subject to the annual tax if all of the following apply:• It is not doing business in California.• It is not registered in California.• It is not organized in California.
G Penalties and InterestFailure to File a Timely Return or Provide InformationA penalty is assessed against the partnership if it is required to file a partnership return and one of the following occur: • It fails to file the return on time, including extensions.• It files a return, including Schedules K-1 (565), that fails to show all
the information required.The amount of the penalty for each month, or part of a month (for a maximum of five months) that the failure continues, is $10 multiplied by the total number of partners in the partnership during any part of the taxable year for which the return is due. Interest will be charged on the penalty from the date the notice of tax due is sent by the FTB to the date the return is filed.“Small partnerships,” as defined in IRC Section 6231, the federal exception to the imposition of penalties for failure to file partnership returns, does not apply for California purposes. For more information see R&TC Section 19172.Failure to Pay Total Tax by Due DateFor LPs, LLPs, and REMICs that must pay the $800 annual tax with Form 565, a penalty for late payment of tax may be assessed. Any LP, LLP, or REMIC that fails to pay the $800 annual tax by the original due date is assessed a penalty of 5% of the unpaid tax, plus 0.5% for each month or part of a month (not to exceed 40 months) the tax remains unpaid. This penalty cannot exceed 25% of the unpaid tax. Interest will be due and payable on the late payment.InterestInterest is due and payable on any tax due if not paid by the original due date. Interest is also due on some penalties. The automatic extension of time to file does not stop interest from accruing. California follows
federal rules for the calculation of interest. Get FTB Pub. 1138, Business Entity Refund/Billing Information, for more information.Other Penalties/FeesA penalty may also be charged if a payment is returned for insufficient funds. In addition, fees may be charged for the cost of collections.
H Accounting MethodsCompute ordinary income or loss by the accounting method regularly used to maintain the partnership’s books and records. This method must clearly reflect the partnership’s income or loss.Partnerships given permission to change their accounting method for federal purposes should see IRC Section 481 for information relating to the adjustments required.Generally, a partnership may not use the cash method of accounting if the partnership has a corporate partner, average annual gross receipts of more than $5 million, or is a tax shelter. For exceptions, see IRC Section 448.The mark-to-market accounting method is required for securities dealers. The IRC Section 481 adjustment is taken into account ratably over five years beginning with the first income year.
I Accounting PeriodsPartnership returns normally must be filed for an accounting period that includes 12 full months. A short period return must be filed if the partnership is created or terminated within the taxable year. In that case, please write “Short Period” in red ink at the top of Form 565, Side 1.For information on the required taxable year of a partnership, see the instructions for federal Form 1065.
J Amended ReturnIf, after the partnership files its return, it becomes aware of changes it must make, the partnership should file an amended Form 565 and an amended paper Schedule K-1 (565) for each affected partner, if applicable. Check the “Amended Return” box on Form 565, Side 1, Item I(3) and on Schedule K-1 (565), Side 1, Item H(2). Give a corrected Schedule K-1 (565) labeled “Amended” to each affected partner. If the partnership originally filed a group nonresident partner Long Form 540NR, the partnership should file an amended Form 540NR.If the partnership wishes to file amended Schedules K-1 (565) via CD or diskette see General Information S, Substitute Schedules.If the partnership’s federal return is changed for any reason, the federal change may affect the partnership’s California return. This would include changes made because of an examination. The partnership must file an amended return within six months of the final federal adjustments. The partnership should attach a copy of the federal Revenue Agent’s Report or other notice of the adjustments to the return. The partnership should inform the partners that they may also be required to file amended returns based on any changes made by the IRS within six months from the date of the final federal adjustments.
K Required Information ReturnsEvery partnership must file information returns if, in the course of its trade or business any of the following occur:• The partnership makes payments of rents, salaries, wages, annuities,
or other fixed or determinable income during one taxable year totaling $600 or more to one person.
• The partnership pays an individual or one payee interest and dividends totaling $10 or more.
• The partnership receives cash payments over $10,000.Payments of any amount by a broker, dealer, or barter exchange agent must also be reported.Partnerships must report payments made to California residents by providing copies of federal Form 1099. Get FTB Pub. 4227A, A Guide to Information Returns Filed With California, for more information.If the partnership has nonresident partners, see the reporting and withholding requirements on Form 592, Nonresident Withholding Annual
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Return; Form 592-A, Nonresident Withholding Remittance Statement; and Form 592-B, Nonresident Withholding Tax Statement.Partnerships must submit a copy of federal Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, within 15 days after the date of the transaction.Partnerships must report interest paid on municipal bonds issued by a state other than California or a municipality other than a California municipality and that are held by California taxpayers. Entities paying interest to California taxpayers on these types of bonds are required to report interest payments totaling $10 or more paid after January 1, 2007. Information returns will be due June 2, 2008. Get form FTB 4800, Federally Tax Exempt Non-California Bond Interest and Interest-Dividend Payment Information, for more information.Partnerships must use form FTB 3834, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, to report interest due or to be refunded under the look-back method on long-term contracts.If you are filing Form 3834 to compute the interest due or to be refunded under the look-back method, attach a copy of Form 3834 to Form 565.Any information returns required for federal purposes under IRC Sections 6038, 6038A, and 6038B are also required for California purposes. Attach the information returns to Form 565 when filed. If the information returns are not provided, penalties may be imposed.Mail all information returns, unless otherwise noted, separately from Form 565. Information returns should be mailed to: FRANCHISE TAX BOARD
PO BOX 942857 SACRAMENTO CA 94257-0600
L Special ItemsCalifornia law generally follows federal law in the areas of:• IRC Section 702(a) items• Elections• Distributions of unrealized receivables and inventory items• Partners’ dealings with the partnership• Contributions to the partnership• Income of foreign nonresident partners subject to withholding,
Forms 592, 592-A, and 592-B• Basis and at-risk rules• Passive activity limitations• Net operating loss deductions by a partner (a partnership is not
allowed the deduction)• Publicly traded partnerships (PTP)• Long-term contracts• Installment sales• Vacation pay• Amortization of past service costs• Distributions of contributed property by a partnership• Recognition of precontribution gain in certain partnership
distributions to contributing partnersSee the instructions for federal Form 1065 for specific information about these provisions.
M SignaturesGeneral PartnerForm 565 is not considered a valid return unless it is signed by a general partner. If a receiver, trustee in bankruptcy, or assignee controls the organization’s property or business, that individual must sign the return.Paid Preparer’s InformationAnyone who is paid to prepare the partnership return must sign the return and complete the “Paid Preparer’s Use Only” area of the return.The paid preparer must do all of the following:• Complete the required preparer information.• Sign in the space provided for the preparer’s signature.• Give the partnership a copy of the return in addition to the copy to be
filed with the FTB.
An individual who prepares the return and does not charge the partnership should not sign the partnership return.
N Group ReturnsNonresidents or Part-year Residents For taxable years beginning on or after January 1, 2006, a corporation may file a group nonresident return on behalf of certain electing nonresident individuals who receive wages, salaries, fees, or other compensation from that corporation for director services performed in California, including attendance of board of directors’ meetings in California.The laws guiding California’s taxation of nonresidents, former nonresidents, and part-year residents changed for taxable years beginning in 2002. The new laws set rules for calculating loss carryovers, deferred deductions, and deferred income. The new laws also change the tax computation method to recognize those items. Get FTB Pub. 1100, Taxation of Nonresidents and Individuals Who Change Residency, for more information. Nonresident partners of a partnership doing business or deriving income from sources within California may elect to file a group nonresident return (R&TC Section 18535). Get FTB Pub. 1067, Guidelines for Filing a Group Form 540NR, for more information.
O Investment PartnershipsIncome of nonresident partners, including banks or corporations, derived from “qualifying investment securities” of an “investment partnership” is considered income from sources other than California, except as noted below. Therefore, nonresident partners generally will not be taxed on this income. The partnership should inform its nonresident partners if all or a portion of their distributive share of income is from “qualifying investment securities” of an “investment partnership” and whether it is sourced to California. See Specific Instructions, Question V on page 13 of this booklet, for definitions of qualifying investment securities and investment partnership.However, for apportioning purposes, income from a partnership that is an investment partnership is generally considered business income (see Appeal of Estate of Marion Markus, Cal. St. Bd. of Equal., May 6, 1986). Investment partnerships doing business within and outside California should apportion California source income using California Schedule R, Apportionment and Allocation of Income.Investment partnerships doing business solely within California should treat all business income of the investment partnership as California source income.Investment partnerships that have California source income should fill out column (e) of the Schedule K-1 (565) showing each partner’s distributive share of California source income.Generally, partners who are nonresident individuals would not record this income as California source income. However, there are two exceptions to the general rule when a nonresident individual may have California source income from an investment partnership. Nonresident individual partners will be taxed on their distributive shares of income from the investment partnership if the income from the qualifying investment securities is interrelated with either of the following:• Any other business activity of the nonresident partner.• Any other entity in which the nonresident partner owns an interest
that is separate and distinct from the investment activity of the partnership and that is conducted in California.
Corporations that are partners in an investment partnership are generally not taxed on their distributive share of partnership’s income, provided that the income from the partnership is the corporation’s only California source income. However, the corporation will be taxed on its distributive share of California source income of the partnership if either of the following apply:• The corporation participates in the management of the investment
activities of the investment partnership.• The corporation has derived income from or attributable to sources
within California other than income from the investment partnership.
Page 8 Form 565 Booklet 2007
P Cancelling a Limited Partnership (LP) or Limited Liability Partnership (LLP)
LPs and LLPs are required to pay the $800 annual tax and file Form 565 until the appropriate papers are filed with the California SOS.For taxable years beginning on or after January 1, 2006, the annual tax will not be assessed if the LP or LLP meets the following requirements:1. The LP or LLP files a timely Final Partnership Return of Income for
the preceding taxable year, including extension.2. The LP or LLP did not do business in California after the final taxable
year.3. The LP or LLP files the appropriate documents for dissolution
with the California SOS within 12 months of the timely filed Final Partnership Return of Income.
Limited Partnerships (LPs)In order to terminate a limited partnership, the following steps must be taken:1. File a timely final California return (Form 565) with the FTB and pay
the $800 annual tax for the taxable year of the final return.2. File Form LP-4/7, Certificate of Cancellation, with the California SOS.
The California SOS also requires a domestic limited partnership to file Form LP-3, Certificate of Dissolution. Please contact the California SOS for more details.
The Form LP-4/7’s effective date will stop the assessment of the $800 annual tax for future taxable years. If Form LP-4/7 is filed after the taxable year ending date, a subsequent year’s return and an additional $800 tax may be required. However, if the LP does no business after the end of the taxable year for which the final annual return is filed, and the LP files its termination documents with the California SOS before 12 months from the date the final return was timely filed, the LP will not owe the annual tax for subsequent years.Example – LP files a timely 2006 return marked final on April 15, 2007,and pays the $800 annual tax for 2006. LP does no business after 2006. LP files its termination documents with the California SOS before April 15, 2008. LP does not owe the $800 annual tax for 2007.
Limited Liability Partnerships (LLPs)In order to terminate a limited liability partnership, the following steps much be taken:1. File a timely final California return (Form 565) with the FTB and pay
the $800 annual tax for the taxable year of the final return.2. File Form LLP-4, Notice of Change of Status, with the California SOS.
Please contact the California SOS for more details.The Form LLP-4’s effective date (the date Form LLP-4 is received by the California SOS) will stop the assessment of the $800 annual tax for future taxable years. If Form LLP-4 is filed after the taxable year ending date, a subsequent year return and an additional $800 may be required.
Additional InformationFor more information on how to cancel your LP or LLP, contact:
By Mail: BUSINESS ENTITY CALIFORNIA SECRETARY OF STATE PO BOX 944225 SACRAMENTO CA 94244-2250In Person: CALIFORNIA SECRETARY OF STATE 1500 11TH STREET SUITE 345 SACRAMENTO CA 95814Phone Number: (916) 653-3365Office hours are Monday through Friday, 8 a.m. to 5 p.m.Website: www.SOS.ca.gov Email address: [email protected] the partnership is being terminated or cancelled to convert to another type of business entity, be sure to file the appropriate forms with the California SOS.
Q Withholding RequirementsForeign (non U.S.) Nonresident PartnersAs described in IRC Section 1446 and modified by R&TC Section 18666, if a partnership has any income or gain from a trade or business within California, and if any portion of that income or gain is allocable under IRC Section 704 to a foreign (non U.S.) nonresident partner, the partnership is required to withhold tax on the allocable amount.State and Federal Differences Regarding Foreign (non U.S.) Nonresident PartnersCalifornia generally conforms to IRC Section 1446 and corresponding federal rulings and procedures. The main differences between California and federal laws in this area are:a. The California withholding rate is 8.84% for C corporations and 9.3%
for individuals, partnerships, and fiduciaries.b. Income attributable to the disposition of California real property is
subject to withholding under R&TC Section 18662.Domestic (U.S.) Nonresident PartnersA partnership is required to withhold funds for income or franchise taxes when it makes a distribution of income to a domestic (U.S.) nonresident partner (R&TC Section 18662). This includes prior year income that should have been, but was not, previously reported as income from California sources on the partner’s California income tax return. However, withholding is not required if distributions of income from California sources to the partner are $1,500 or less during the calendar year or if the FTB directs the payer not to withhold.Domestic (U.S.) nonresident partners include individuals who are nonresidents of California and corporations that are not qualified to do business in California or do not have a permanent place of business in California. Domestic (U.S.) nonresident partners also include nonresident estates, trusts, LLCs, and partnerships that do not have a permanent place of business in California. Foreign nonresident partners covered under R&TC Section 18666 are not domestic nonresident partners.Partnerships with income from within and outside California must make a reasonable estimate of the ratio, to be applied to the distributions, that approximates the ratio of California source income to total income. The ratio for the prior year will generally be accepted as reasonable in determining the California part of the distribution subject to the withholding. Partnerships are required to withhold at a rate of seven percent of distributions (including property) of income from California sources made to domestic nonresident partners.The FTB has administrative authority to allow reduced withholding rates, including waivers, when requested in writing. These authorizations may be one-time, annual, or for a longer period. Waivers or reduced withholding rates will normally be approved when distributions are made by publicly traded partnerships and on distributions to brokerage firms, tax-exempt organizations, and tiered partnerships.No withholding is required if the distribution is a return of capital or does not represent taxable income for the current or prior years. Although a waiver is not required in this situation, if upon examination the FTB determines that withholding was required, the partnership may be liable for the withholding and penalties.Send waiver requests and inquiries to: WITHHOLDING SERVICES and COMPLIANCE
FRANCHISE TAX BOARD PO BOX 942867 SACRAMENTO CA 94267-0651
Telephone: (888) 792-4900 (U.S. toll-free) or (916) 845-4900
The withholding should be reported on and sent with Form 592, Form 592-A, and/or Form 592-B. For more information, get FTB Pub. 1017, Nonresident Withholding S Corporation and Partnership Guidelines.The taxable income of nonresident partners is the distributive share of California sourced partnership income, not the distributed amount.
R Check-the-Box RegulationsCalifornia generally conforms to the federal entity classification regulations (commonly known as “check-the-box” regulations). These regulations allow certain unincorporated entities to choose tax treatment as a partnership, a corporation, or an entity disregarded as separate from its owner (SB 1234, Stats. 1997, Ch. 608). Generally, any elections made for federal purposes under the federal “check-the-box” regulations are considered California elections. No separate elections are allowed. If federal Form 8832, Entity Classification Election, is filed with the federal return, a copy should be attached to the electing entity’s California return for the year in which the election is effective. The entity should file the appropriate California return.An “eligible entity” may choose its classification. An eligible entity is a business entity that is not a trust, a corporation organized under a federal or state statute, a foreign entity specifically listed as a per se corporation, or other special business entities. Other special business entities under the IRC include PTPs, REMICs, financial asset securitization investment trusts (FASITs), or regulated investment companies (RICs). An eligible entity with two or more owners will be a partnership (for tax purposes) unless it elects to be taxed as a corporation. An eligible entity with a single owner will be disregarded for tax purposes, unless the entity elects to be taxed as a corporation. If the separate existence of an entity is disregarded, its activities are treated as activities of the owner and are reported on the appropriate California return.IMPORTANT: The exception to the general rule exists under R&TC Section 23038(b)(2)(C) in the case of an eligible business entity. The exception does not apply to a business entity which, during the 60 month period preceding January 1, 1997, was appropriately classified as an association taxable as a corporation and met all of the following conditions: • The business entity was not doing business in California.• The business entity did not derive income from sources within
California.• The business entity had no partners who were residents of California. The eligible business entities are generally: 1) Business trusts that were classified as corporations under California law, but were classified as partnerships for federal tax purposes for taxable years beginning before January 1, 1997; and 2) Previously existing foreign single member limited liability companies (SMLLCs) that were classified as corporations under California law but claimed to be partnerships for federal tax purposes for taxable years beginning before January 1, 1997. These business trusts and previously existing foreign SMLLCs will continue to be classified as corporations for California tax purposes and must continue to file Form 100, unless they make an irrevocable election to be classified or disregarded the same as they are for federal tax purposes. See form FTB 3574, Special Election for Business Trusts and Certain Foreign Single Member LLCs, and Cal. Code Regs., tit. 18 sections 23038(a)-(b).
S Substitute SchedulesPartnerships or their tax professional must get approval from the FTB to use a substitute schedule, if any of the following apply: • The partnership wants to use paperless Schedules K-1 (565).• The partnership does not use the official California Schedule K-1
(565) prepared by the FTB.• The partnership does not use a software program with an
FTB-approved Schedule K-1 (565.)If you use computer software, please read the company’s user manual to make sure you have the necessary hardware and printer fonts to produce FTB-approved forms. All printing should be done to the standards specified in FTB Pub. 1098, Guidelines for the Development and Use of Substitute, Scannable, and Reproduced Tax Forms. For more information, go to our Website and search for FTB Pub. 1095D, Tax Practitioner Guidelines for Computer-Prepared Returns.Partnerships are subject to penalties for failure to file the appropriate Schedule K-1 (565). See General Information G, Penalties and Interest.
To participate in the FTB’s substitute forms program, get FTB Pub. 1098, and form FTB 1096, Agreement to Comply with FTB Pub. 1098, Annual Requirements and Specifications.Paperless Schedule K-1 (565)For the procedures, formatting specifications, and record layouts required to program paperless Schedules K-1 (565) get FTB Pub. 1062, Guide for Filing Paperless Schedules K-1 (565 or 568). The transmittal FTB 3604 must accompany paperless Schedules K-1 (565) submitted on CD or diskette. Form FTB 3604 is included in FTB Pub. 1062, or in a fillable format on our Website at www.ftb.ca.gov.K-1 (565 or 568) TestWare is also available at no charge. K-1 TestWare will help identify and correct errors during programming and before submitting the paperless schedules. K-1 (565 or 568) TestWare includes two programs:• K-1 Verify, edits the Schedule K-1 (565) records to ensure the
fields are the correct length and position that the FTB requires and produces an edit report.
• K-1 Convert, converts spreadsheet formats to standard fixed length formats so you can use them with K-1 Verify.
Once verification is made to ensure the partnership’s paperless Schedules K-1 (565) pass the K-1 Verify program, send the schedules to the FTB using form FTB 3604. Multiple partnerships can be put on the same CD or diskette. It is not necessary to provide a separate CD or diskette for each partnership. However, include each partnership’s name, FEIN, and number of Schedules K-1 for that partnership in the space provided on form FTB 3604.If the partnership files paperless Schedules K-1 (565), file all Schedules K-1 (565) for that partnership using the paperless process. Do not file paper Schedules K-1 (565) with the Form 565 if the partnership has filed or will file paperless Schedules K-1 (565). Do not file Schedules K-1 (565) on microfiche or file federal Schedules K-1 (1065) with the Form 565. To get the publication and the K-1 Testware go to our Website at www.ftb.ca.gov and search for testware.Assistance is available from our e-file Help Desk at (916) 845-0353.
Additional InformationCalifornia Use TaxGeneral Information The use tax has been in effect in California since July 1, 1935. It applies to purchases from out-of-state sellers and is similar to the sales tax paid on purchases made in California. In general, partnerships must pay California use tax on purchases made from outside California (for example, by telephone, over the Internet, by mail, or in person) if either of the following apply:• The seller does not collect California sales or use tax.• The partnership uses, gives away, stores, or consumes the item in
this state. Example: The Partnership purchases a conference table from a company in North Carolina. The company ships the table from North Carolina to the partnership’s address in California for the partnership’s use and does not charge California sales or use tax. The partnership owes use tax on the purchase. Complete the Use Tax Worksheet on page 11 to calculate the amount due.Extensions to file. If the partnership requests an extension to file its tax return, wait until the partnership files its return to report the purchases subject to use tax and to make the use tax payment.To avoid late payment penalties for use tax, the partnership must report and pay the use tax with a timely filed income tax return.Changes in use tax reported. Do not file an Amended Partnership Return of Income to revise the use tax previously reported. If the partnership has changes to the amount of use tax previously reported on the original tax return, contact the State Board of Equalization.
Page 10 Form 565 Booklet 2007
For assistance, go to the State Board of Equalization’s Website at www.boe.ca.gov or call their Information Center at (800) 400-7115 or TTY/TDD (800) 735-2929. Income tax information is not available at this number.
Specific InstructionsForm 565Fill In All Applicable Lines and SchedulesEnter the total amounts on the applicable lines of Schedule K (565), Partners’ Share of Income, Deductions, Credits, etc. Do not enter these items directly on Form 565, Side 1, Schedule A or Schedule D. Do not apply the apportionment factor to the items on Schedule K (565). Enter any items specially allocated to the partners on the applicable line of the partner’s Schedule K-1 (565).Whole numbers should be shown on the return and accompanying schedules.Name, Address, FEIN, and California SOS File NumberThe partnership may use its legal or trade name on all California returns and other documents filed. Print the partnership’s legal or trade name, address, FEIN, and California SOS file number.• Federal employer identification number (FEIN) (nine digits)• Secretary of State (California SOS) file number (10 or 12-digits)
(begins with “19 or “20”)• Partnership name (use the legal name filed with the California SOS)
and address (include PMB no., if applicable)If the partnership leases a PMB from a private business rather than a PO box from the United States Postal Service, include the box number in the address area. Example: 111 Main Street PMB 123.Item C – Principal Business Activity Code (PBA) California uses the 6-digit federal PBA Code based on the North American Industry Classification System (NAICS).Common trust funds are required to use PBA code 525920. Investment clubs are required to use PBA code 523910. For further information, see the instructions for federal Form 1065.Item F – Total Assets at End of Taxable YearSee the instructions for Question O before completing this item.If the partnership is required to complete this item, enter the total assets at the end of the partnership’s taxable year. This is determined by the accounting method regularly used to maintain the partnership’s books and records. If there are no assets at the end of the taxable year, enter the total assets as of the beginning of the taxable year.
IncomeLine 1 through Line 1�California’s reporting requirements are generally the same as the federal reporting requirements. Follow the instructions for federal Form 1065 and only include trade or business activity income on line 1 through line 12. However, for California tax purposes, business income of the partnership is computed using the rules set forth in R&TC Section 25120. Therefore, certain income that may be portfolio income for federal purposes may be business income for California sourcing purposes. Do not include rental activity income or portfolio income on these lines. Rental activity income and portfolio income are separately reported on Schedule K (565) and Schedule K-1 (565). Rental real estate activities are also reported on federal Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation. Attach a copy of federal Form 8825 to Form 565. Use California numbers and attach a statement reconciling any differences between federal and California amounts.Use worldwide amounts determined under California law when completing these lines.Form 565, line 4 through line 11 has been separated to report total gains and total losses. Net amounts are no longer reported.
Line 6 – Total Farm Profit Line 7 – Total Farm LossEnter on line 6 the partnership’s total farm profit from federal Schedule F (Form 1040), Line 36, Profit or Loss From Farming. Enter on line 7 the partnership’s total farm loss from federal Schedule F (Form 1040), Line 36, Profit and Loss From Farming. Attach federal Schedule F to Form 565. If the amount includable for California purposes is different from the amount on federal Schedule F, enter the California amount and attach a note explaining the difference.Line 8 – Total Gain from Schedule D-1Line 9 – Total Loss from Schedule D-1Include only ordinary gains (losses) from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains (losses) from the sale, exchange, or involuntary conversion of rental activity assets must be reported separately on Schedule K (565) and Schedule K-1 (565).A partnership that is a partner in another partnership must include on Schedule D-1, Sales of Business Property, its share of ordinary gains (losses) from sales, exchanges, or involuntary conversions (other than casualties or thefts) of the other partnership’s trade or business assets.
DeductionsLine 1� through Line ��California’s reporting requirements are generally the same as the federal reporting requirements. Follow the instructions for federal Form 1065 and only include trade or business activity deductions on line 13 through line 21. Include amounts for repairs, rents, and taxes on line 21. Do not include any rental activity expenses or deductions that are allocable to portfolio income on these lines. Rental activity deductions and deductions allocable to portfolio income are separately reported on Schedule K (565) and Schedule K-1 (565).Use worldwide amounts determined under California law when completing these lines.Federal reporting requirements for organization expenses, syndication expenses, and uniform capitalization rules apply for California.Claim of Right. To claim the deduction, enter a deduction on line 21. If you elect to take the credit instead of the deduction, remember to use the California tax rate, add the credit amount to the total on line 27, Total payments. To the left of this total, write IRC 1341 and the amount of the credit.Line 17a – Depreciation and AmortizationEnter on line 17a the total depreciation and amortization claimed on assets used in a trade or business activity. Complete and attach form FTB 3885P, Depreciation and Amortization, included in this booklet, to figure depreciation and amortization. Transfer the total from form FTB 3885P, line 6, to Form 565, Side 1, line 17a, or federal Form 8825, line 14, or as appropriate (use California amounts). See the instructions for form FTB 3885P for more information.Do not include any expense deduction for recovery property (IRC Section 179; Enterprise Zones, R&TC Section 17267.2; Targeted Tax Area, R&TC Section 17267.6; and Local Agency Military Base Recovery Area, R&TC Section 17268) on this line. This expense is not deducted by the partnership. Instead, it is passed through separately to the partners and is reported on line 12 of Schedule K (565) and Schedule K-1 (565).Line �4 – TaxEnter the $800 annual tax required for LPs, LLPs, and REMICs. See General Information F, Annual Tax, for further details on the annual tax requirements.Line �5 – Nonresident Withholding CreditIf taxes were withheld from payment to the partnership, the partnership can either allocate the entire withholding credit to all its partners or claim a portion (not to exceed the total tax due) and allocate the remaining portion to all its partners. If the partnership claims any of the amount withheld, attach Form 592-B from the withholding entity to the front lower portion of the partnership return. The partnership must file Forms 592 and 592-B to allocate any remaining withholding credit
Form 565 Booklet 2007 Page 11
to its partners. For more information, get FTB Pub. 1017, Nonresident Withholding S Corporation and Partnership Guidelines.The above explanation does not apply to the nonconsenting nonresident member’s tax paid by an LLC on behalf of the nonresident member. The nonconsenting nonresident members’ tax is not related to the partnership withholding on nonresident partners. Therefore, the tax cannot be claimed using Forms 592 and 592-B; and cannot be claimed by the partnership on this line. The partnership will allocate the entire amount paid by the LLC on its behalf to all of its partners on Schedule K and Schedule K-1 (565), line 15e. Line �9 – Use TaxAs explained on page 9, California use tax applies to purchases from out of state sellers (for example, purchases made by telephone, over the Internet, by mail, or in person). For questions on whether a purchase is taxable, go to State Board of Equalization’s Website at www.boe.ca.gov, or call their Information Center at (800) 400-7115 or TTY/TDD (800) 735-2929.A partnership may report use tax on its Partnership Return of Income instead of filing a use tax return with the California State Board of Equalization. To report use tax on the partnership tax return, complete the Use Tax Worksheet below. If the partnership owes use tax but does not report it on its Partnership Return of Income, the partnership must report and pay the tax to the California State Board of Equalization. To do so, download a copy of Publication 79-B, California Use Tax, from www.boe.ca.gov or request a copy by calling their Information Center.To avoid late payment penalties for use tax, the partnership must report and pay the use tax with a timely filed income tax return. Failure to timely report and pay the use tax due may result in the assessment of penalties.Note: Businesses that have a California seller’s permit must continue to report business purchases subject to use tax on their sales and use tax returns.
Use Tax WorksheetRound all amounts to the nearest whole dollar.
1. Enter purchases from out-of-state or Internet sellers made without payment of California sales/use tax. See worksheet instructions below . . . . . . . . . . . . . . . . . .$ ________.00
2. Enter the decimal equivalent of the applicable sales and use tax rate. See worksheet instructions below . . . . . . . . ________
3. Multiply line 1 by the tax rate on line 2. Enter result here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ ________.00
4. Enter any sales or use tax paid to another state for purchases included on line 1. See worksheet instructions below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ ________.00
5. Total Use Tax Due. Subtract line 4 from line 3. Enter the amount here and on line 29. If the amount is less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . .$ ________.00
Worksheet, Line 1, Purchases Subject to Use Tax• Report items that would have been taxable in a California store, such
as office equipment and supplies.• Include handling charges.• Do not include any other state’s sales or use tax paid on the purchases.• Enter only purchases made during the year that corresponds with the
tax return the partnership is filing.Note: Report and pay any use tax you owe on the following purchases to the State Board of Equalization, not on your income tax return.• Vehicles, vessels, and trailers that must be registered with the
Department of Motor Vehicles.• Mobile homes or commercial coaches that must be registered
annually as required by the Health and Safety Code.• Vessels documented with the U.S. Coast Guard.• Aircraft.• Leases of machinery, equipment, vehicles, and other tangible
personal property.
Worksheet, Line �, Sales and Use Tax Rate• Enter the decimal equivalent of the sales and use tax rate applicable
to the place in California where the property is used, stored, or otherwise consumed. For example, the decimal equivalent of 7.25% is 0.0725, and the decimal equivalent of 7.375% is 0.07375.
• If the partnership does not know the applicable rate, see the table on this page and on page 12. “Sales and Use Tax Rates by County.” If the partnership has questions regarding the use tax rate in effect in the partnership’s area, go to the State Board of Equalization’s Website at www.boe.ca.gov or call their Information Center at (800) 400-7115 or TTY/TDD (800) 735-2929.
Worksheet, Line 4, Credit for Tax Paid to Another State• This is a credit for tax paid to other states. The partnership cannot
claim a credit greater than the amount of tax that would have been due if the purchase had been made in California. For example, if the partnership paid $8.00 sales tax to another state for a purchase, and would have paid $6.00 in California, the partnership can claim a credit of only $6.00 for that purchase.
Sales and Use Tax Rates by County(includes state, local, and district taxes)
1. Many cities in California impose a district tax which results in a higher sales and use tax rate than in other parts of the county. If you are reporting an item that was purchased for use in one of these counties, please check the following city list to see if a higher rate applies to your city. The tax rates shown apply within the city limits of the listed community.
2. The tax rate in Madera County prior to April 1, 2007 was 7.25%.3. The tax rate in Tulare County prior to April 1, 2007 was 7.25%.
1. The tax rate in Williams prior to April 1, 2007 was 7.25%. 2. The tax rate in Pinole prior to April 1, 2007 was 8.25%. 3. The tax rate in Inglewood prior to April 1, 2007 was 8.25%. 4. The tax rate in Del Rey Oaks prior to April 1, 2007 was 7.25%. 5. The tax rate in Nevada City prior to April 1, 2007 was 7.375%. 6. The tax rate in San Bernardino prior to April 1, 2007 was 7.75%. 7. The tax rate in Vista prior to April 1, 2007 was 7.75%. 8. The tax rate in Manteca prior to April 1, 2007 was 7.75%. 9. The tax rate in Arroyo Grande prior to April 1, 2007 was 7.25%.10. The tax rate in Grover Beach prior to April 1, 2007 was 7.25%.11. The tax rate in Morro Bay prior to April 1, 2007 was 7.25%.12. The tax rate in San Luis Obispo prior to April 1, 2007 was 7.25%.13. The tax rate in Santa Cruz prior to April 1, 2007 was 8.25%.14. The tax rate in Watsonville prior to April 1, 2007 was 8.00%.15. The tax rate in Dinuba prior to April 1, 2007 was 8.00%.16. The tax rate in Farmersville prior to April 1, 2007 was 7.75%.17. The tax rate in Porterville prior to April 1, 2007 was 7.75%.18. The tax rate in Tulare prior to April 1, 2007 was 7.75%.19. The tax rate in Visalia prior to April 1, 2007 was 7.50%.
Schedule A — Cost of Goods SoldCalifornia’s reporting requirements are generally the same as the federal reporting requirements. Follow the instructions for federal Form 1065, Schedule A.
QuestionsQuestion JCheck only one box for this question. The partnership checks the box that best describes its business type. For definitions of general partnership, limited partnership, REMIC, and LLP, see General Information C, Definitions, and the instructions for federal Form 1065.
The term “doing business” means actively engaging in any transaction for the purpose of financial gain or profit (R&TC Section 23101).Line Item 6 of Question J is for other types of entities not previously mentioned on line 1 through line 5. If your entity is not a general partnership, limited partnership, REMIC, or LLP, then check the box for line item 6 only. In the space provided, write in the type of entity.Question K Enter the maximum number of partners in the partnership during the taxable year. The number of Schedules K-1 (565) sent via magnetic media or attached to Form 565, must equal the number of partners entered in Question K. Do not use abbreviations or terms such as “Various.”Question OIf the answers to Question 5a through Question 5c on federal Form 1065, Schedule B are all “Yes,” answer “Yes” to Question O on Form 565.If Question O is answered “Yes,” the partnership is not required to complete Schedules L, M-1, M-2, or Item F, on Side 1 of Form 565 or Item J on Schedule K-1 (565).Question T All partnerships must answer all three questions. If you do not own or lease (as specified below) real property in California, answer “No” to the questions. (Real property includes land, buildings, structures, fixtures – see R&TC Section 104).The questions provide information regarding changes in ownership with regard to real property held by legal entities (R&TC Section 64). If any of the answers are “Yes,” a Statement of Change in Control and Ownership of Legal Entities (BOE-100-B) must be filed with the California State Board of Equalization (BOE); failure to do so may result in substantial penalties. Forms and information may be obtained from the BOE Website at www.boe.ca.gov and can be accessed through Property Tax, and then Legal Entity Ownership Program.There may be a change in ownership or control if, during this year, one of the following occurred with respect to this partnership (or any legal entity in which it holds a controlling or majority interest):• The percentage of partnership interests transferred to, or owned or
controlled by one person or one legal entity cumulatively exceeded 50%.
• The total partnership interests transferred to or held by one irrevocable trust or trust beneficiary cumulatively exceeded 50%.
• This partnership, or any legal entity in which it holds a controlling or majority interest, cumulatively acquired ownership or control of more than 50% of the partnership or other ownership interests in any legal entity.
• As of the end of this year, cumulatively more than 50% of the total partnership interests have been transferred or the partnership experienced a change in ownership or control in one or more transactions since March 1, 1975.
For purposes of these questions, leased real property is a leasehold interest in taxable real property: (1) leased for a term of 35 years or more (including renewal options), if not leased from a government agency; or (2) leased for any term, if leased from a government agency. R&TC section 64(e) requires this information for use by the California State BOE.Question UCalifornia requires taxes to be withheld from certain payments or allocations of income and sent to the FTB (R&TC Section 18662 and Section 18666). If upon examination, the FTB determines that tax withholding was required, the partnership can be liable for the tax and penalties.The reference to Forms 592, 592-A, and 592-B relates to withholding done by the partnership. If you need additional information concerning partnership withholding, see General Information K, Required Information Returns, and Q, Withholding Requirements.
Form 565 Booklet 2007 Page 1�
Question V – Investment Partnership.An “investment partnership” is a partnership that meets the following two criteria:1. No less than 90% of the cost of the partnership’s total assets consist
of:• Qualifying investment securities• Deposits at banks or other financial institutions• Office equipment and office space reasonably necessary to carry
on the activities of an investment partnership2. No less than 90% of the partnership’s gross income is from interest,
dividends, and gains from the sale or exchange of qualifying investment securities defined in R&TC Section 17955 and Section 23040.1.
Qualifying investment securities include all of the following:• Common and preferred stock, as well as debt securities convertible
into common stock.• Bonds, debentures, and other debt securities.• Foreign and domestic currency deposits or equivalent and securities
convertible into foreign securities.• Mortgage-backed or asset-backed securities secured by
governmental agencies.• Repurchase agreements and loan participations.• Foreign currency exchange contracts and forward and futures
contracts on foreign currencies.• Stock and bond index securities and futures contracts, and other
similar securities.• Regulated futures contracts.• Options to purchase or sell any of the preceding qualified investment
securities, except regulated futures contracts.Qualifying investment securities do not include an interest in a partnership, unless the partnership qualifies as an investment partnership. See R&TC Section 17955 and Section 23040.1 and General Information O, Investment Partnerships, for more information.Question XFederal Form 8886, Reportable Transaction Disclosure Statement, is required to be attached to any return on which a deduction, loss, credit, or any other tax benefit is claimed or is reported, or any income the partnership’s reported from an interest in a registration-required tax shelter. If the partnership is required to file this form with the federal return, attach a copy to the partnership’s Form 565. Do not attach copies of federal Schedules K-1 (1065).A Reportable Transaction is any transaction as defined in R&TC Section 18407 and Treas. Reg. 1.6011-4 and includes, but is not limited to: • A Confidential Transaction, which is offered to a taxpayer under
conditions of confidentiality and for which the taxpayer has paid a minimum fee.
• A transaction with contractual protections which provides the taxpayer with the right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained.
• A loss transaction under Section 165, which is at least $10 million in any one-year or $20 million in any combination of taxable years for a partnership that has only corporations as partners, (looking through partners that are themselves partnerships); or, $2 million in any one-year or $4 million in any combination of taxable years for all other partnerships. (Those numbers would be reduced to $2 million and $4 million on the Form 100S, California S Corporation Franchise or Income Tax Return).
• A transaction with a significant book-tax difference (entered into prior to August 3, 2007).
• A transaction where the taxpayer is claiming a tax credit of greater than $250,000 and held the asset for less than 45 days.
• A transaction of interest, which is a transaction that is the same as or substantially similar to one of the types of transactions that has been identified by the Internal Revenue Service as a transaction of interest (entered into prior to August 3, 2007).
A Listed Transaction is a specific reportable transaction, or one that is substantially similar, which has been identified by the Internal Revenue Service or the Franchise Tax Board to be a tax avoidance transaction.
Schedule L — Balance SheetsCalifornia’s reporting requirements are the same as the federal reporting requirements. The amounts reported on the balance sheet should agree with the books and records of the partnership and should include all amounts whether or not subject to taxation. Attach a statement explaining any differences between federal and state amounts or any differences between the balance sheet and the partnership’s books and records. Follow the instructions for federal Form 1065, Schedule L.Domestic partnerships with 10 or fewer partners may not have to complete Schedule L. See the instructions for Question O for the specific requirements to qualify for this exception.
Schedule M-1, Reconciliation of Income (Loss) per Books With Income (Loss) per Return, Schedule M-2, Analysis of Partner’s Capital AccountsDomestic partnerships with 10 or fewer partners may not have to complete Schedule M-1, Schedule M-2, or Item J of Schedule K-1 (565). See the instructions for Question O for the specific requirements to qualify for this exception.If the partnership is required to complete Schedule M-1 and Schedule M-2, the amounts shown should agree with the partnership’s books and records and the balance sheet amounts. Attach a statement explaining any differences.Use worldwide amounts determined under California law when completing Schedule M-1. Also, the amounts on Schedule M-2 should equal the total of the amounts reported in Item J, column (c), of all the partners’ Schedules K-1 (565).Net Income (Loss) Reconciliation for Certain Partnerships. For taxable years beginning on or after January 1, 2006, the IRS requires certain partnerships to complete Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships, instead of Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return. For California purposes, the corporation must complete the California Schedule M-1, and attach either of the following: • A copy of the Schedule M-3 (Form 1065) and related attachments to
the California Partnership Tax Booklet. • A complete copy of the federal return. FTB will accept the Schedule M-3 (Form 1065) in a spreadsheet format if more convenient.
Schedule K (565) and Schedule K-1 (565) — Partner’s Shares of Income, Deductions, Credits, Etc.Purpose of SchedulesSchedule K (565) is a summary schedule for the partnership’s income, deductions, credits, etc. and Schedule K-1 (565) shows each partner’s distributive share. The line items for both of these schedules are the same unless otherwise noted.One copy of each Schedule K-1 (565) must be attached to Form 565 when it is filed with the FTB. For alternative methods of filing Schedules K-1 (565), see General Information S, Substitute Schedules.Be sure to give each partner a copy of their respective Schedule K-1 (565). Also include a copy of the Partner’s Instructions for Schedule K-1 (565) or specific instructions for each item reported on the partner’s Schedule K-1 (565). These items should be provided to the partner on or before the due date of the Form 565.Schedule K (565) OnlyIn column (b), enter the amounts from federal Schedule K. In column (c), enter the adjustments resulting from differences between
Page 14 Form 565 Booklet 2007
California and federal law (not adjustments relating to California source income). In column (d) on Schedule K (565), enter the worldwide income computed under California law. For partners to comply with the requirements of IRC Section 469, trade or business activity income (loss), rental activity income (loss), and portfolio income must be considered separately by the partners. Rental activity income (loss) and portfolio income are not reported on Form 565, Side 1 so that these amounts are not combined with trade or business activity income (loss). Schedule K (565) is used to report the totals of these (and other) amounts.Apportioning partnerships onlyOnce the Schedule K (565) has been completed, apportioning partnerships should also complete Schedule R before completing its partners’ Schedules K-1 (565).Compliance with Partnership Filing RequirementsTo help ensure the accurate and timely processing of your Form 565, please verify the following:• A California approved Schedule K-1 (565) has been sent via magnetic
media or attached (to Form 565) for each partner identified on Form 565, Side 2, Question K. Partnerships eligible for the reduced filing program, see General Information D, Who Must File.
• The Schedule K-1 (565) contains the partner’s correct name, address, and identifying number in the correct fields.
• Questions A through I are completed on Side 1 of Schedule K-1 (565).
• The appropriate entity type box (Schedule K-1 (565), Side 1, Question B) is checked for each partner.
• All Schedules K-1 (565) reconcile to Form 565, Schedule K (565).• The partner’s percentage (Schedule K-1 (565) Question D) is
expressed in decimal format and carried to four decimal places (i.e., 33.5432). Do not print fractions, the percentage symbol (%), or use terms such as “Various.”
• Substitute computer-generated Schedule K-1 (565) forms must be approved by the FTB.
For the highest rate of accuracy and rapid processing, file Schedules K-1 (565) on CD or diskette. See General Information S, Substitute Schedules, for more details.Schedule K-1 (565)The partnership completes the entire Schedule K-1 (565) filling out the partner’s and partnership’s information (name, address, identifying numbers), Questions A through J, and the partner’s distributive share of items.For partners with PMB addresses, include the designation number in the partner’s address area. Precede the number (or letter) with “PMB.”For each individual partner, enter the partner’s social security number. For all other partners enter the FEIN. However, if a partner is an individual retirement account (IRA), enter the identifying number of the custodian of the IRA. Do not enter the social security number of the person for whom the IRA is maintained.The partnership files one California Schedule K-1 (565) for each partner either by CD or diskette or by attaching a copy to the partnership return. Do not attach federal Schedules K-1 (1065). These forms are not California approved forms.A copy of the California Schedule K-1 (565) should be provided to the appropriate partner. The partners should also be provided a copy of either the Partner’s Instructions for Schedule K-1 (565) or specific instructions for each reported item.Determining the Source of the Partnership’s Income for a Resident PartnerA resident partner should include the entire distributive share of partnership income in their California income. If the partnership is apportioning, the partner may be entitled to a credit for taxes paid to other states. The partner should be referred to Form 540, Schedule S, Other State Tax Credit, for more information.
Determining the Source of the Partnership’s Income for a Nonresident PartnerBusiness income: Regardless of the classification of income for federal purposes, income from California sources is determined in accordance with California law, (Cal. Code Regs., tit. 18 section 17951-4). California source business income of a trade or business is determined by apportionment, if the partnership conducts any of the following:• A trade or business wholly within California, the income from that
trade or business is California source income.• A business within and outside California, but the part within
California is so separate and distinct that it can be separately accounted for, then only that separate income within California is California source income.
• A single trade or business within and outside California.The partnership should apportion business income using the Uniform Division of Income for Tax Purposes Act (R&TC Section 25120 through Section 25139). Special rules apply if the partnership has income that is not attributable to the trade or business of the partnership (nonbusiness income).Nonbusiness Income: Nonbusiness income attributable to real or tangible personal property (such as rents, royalties, gains, or losses) located in California is California source income (Cal. Code Regs., tit. 18 section 17951-3 and R&TC Section 25124 and Section 25125). Enter this information on the appropriate line of Schedule K-1 (565). If the partnership believes it may have a unitary partner, the information should also be entered on Side 3, Table 2, Part B, for that partner.The source of nonbusiness income attributable to intangible property depends upon the partner’s state of residence or commercial domicile. Individuals generally source this income to their state of residence and corporations to their commercial domicile.Because the determination of the source of intangible nonbusiness income must be made at the partner level, this income is not entered on Schedule K-1 (565), column (e). It is entered only on Side 3, Table 1.Completing Schedule K-1 (565)• In column (b), enter the amounts from federal Schedule K-1 (1065).• In column (c), enter the adjustments resulting from differences
between California and federal law for each specific line item.• In column (d), enter the result of combining column (b) and
column (c). This is total income under California law.Column (e) is used to report California source income and credits. Include the following items in this column:1. Income from separate businesses, trades, or professions conducted
wholly within California, Cal. Code Regs., tit. 18 section 17951-4(a).2. Income from a trade or business conducted within and outside
California, when the part of business conducted within California can be separately accounted for, Cal. Code Regs., tit. 18 section 17951-4(b).
3. Income from a trade or business conducted within and outside California that is apportioned to California. This includes intangible income attributable to the business, trade, or profession, Cal. Code Regs., tit. 18 section 17951-4(c) and R&TC Sections 25128 through 25137. Generally, the partnership should apportion business income using a four-factor formula consisting of property, payroll, and a double-weighted sales factor. Use a three-factor formula consisting of payroll, property, and a single-weighted sales factor if more than 50% of the business receipts of the partnership are from agricultural, extractive, savings and loans, banks, and financial activities. Apportioning partnerships should complete Schedule R and attach it to Form 565.
4. Nonbusiness income from real and tangible property located in California. Enter the partner’s share of nonbusiness income from real and tangible property located in California in column (e). If the partnership believes it may have a unitary partner, enter this income in Table 2, Part B.
5. California credits.
Form 565 Booklet 2007 Page 15
Nonbusiness income from intangible property should not be entered in column (e). Enter this income in Table 1. For more information, see Partner’s Instructions for Schedule K-1 (565).Completing Column (d) and Column (e)Schedule K-1 (565), column (d), includes the partner’s distributive share of total partnership income, deductions, gains, or losses under California law. Column (e) includes only income, deductions, gains, or losses that are apportioned or sourced to California. The computation of these amounts is a matter of law and regulation. The residency of the partner is not a factor in the computation of amounts to be included in column (d) and column (e).For a partnership that is doing business wholly within California, column (e) will generally be the same as column (d), except for nonbusiness intangible income (for example, nonbusiness interest, dividends, gains, or losses from sales of securities).For a partnership that is doing business within and outside California, the amounts in column (d) and column (e) may be different.If the partnership knows the partner is a resident individual, then the partnership answers “No” to Question I on Schedule K-1 (565), and completes column (d) only. Otherwise, the partnership should complete column (e) for all other partners.Completing Table 1Complete Table 1 only if the partnership has nonbusiness intangible income. If the partnership has nonbusiness intangible income, but knows that the partner is a resident individual, then the partnership does not need to complete Table 1 for the partner.Completing Table �The partnership does not need to complete Table 2 for a partner, if the partnership knows that the partner is not unitary with its trade or business or any other trade or business.Special Rules for Partners and Partnerships in a Single Unitary BusinessSpecial rules apply if the partnership and a partner are engaged in a single unitary business. In that case, a unitary partner will not use the income information shown in column (e). Instead, the partner’s distributive share of business income is combined with the partner’s own business income. The combined business income is apportioned using an apportionment formula that consists of an aggregate of the partner’s share of the apportionment factors from the partnership and the partner’s apportionment factors, Cal. Code Regs., tit. 18 section 25127-1(f). The determination of whether a three-factor or four-factor apportionment formula applies to the combined income will be made at the partner level. The partner’s distributive share of business income and property, payroll, and sales factors are entered in Table 2.If the partnership knows that all of the partners are unitary with the partnership, the partnership need not complete column (e) for any of the Schedules K-1 (565) or attach a Schedule R. For further information, see Partner’s Instructions for Schedule K-1 (565).Special Reporting Requirements for Passive ActivitiesIf items of income (loss), deduction, or credit from more than one activity are reported on Schedule K-1 (565), the partnership must attach a statement to Schedule K-1 (565) for each activity that is a passive activity to the partner. Rental activities are passive activities to all partners; trade or business activities are passive activities to limited partners and to general partners who do not materially participate in the activity. The statement must include all the information explained in the instructions for federal Schedule K-1 (1065).Questions A and E, Schedule K-1 (565)See the federal instructions for Questions I and M on Schedule K-1 (1065).Question B, Schedule K-1 (565)Check the box for the partner’s entity type. An exempt organization should check box 10 regardless of its legal form.
Question D, Schedule K-1 (565)Percentages must be four to seven characters in length and have a decimal point before the four final characters. For example, 50% is represented as 50.0000, 5% as 5.0000, 100% as 100.0000. Do not enter fractions, the percentage symbol (%), or use terms such as “Various.”Questions C and I, Schedule K-1 (565)Check the boxes at Questions C and I for the partner’s California residency status.Specific Line InstructionsThe California Schedule K (565) generally follows the federal Schedule K (1065). Where California and federal laws are the same, the instructions for California Schedule K (565) refer to the instructions for federal Schedule K (1065).When completing the California Schedule K and Schedule K-1, refer to the Federal/State Line References chart that shows the specific line references between the Federal Schedule K and Schedule K-,1 and the California Schedule K and Schedule K-1.
IncomeLine 1 through Line 11cSee the instructions for federal Schedule K (1065), Schedule K-1 (1065), and Schedule K-1 (565) Income (Loss), line 1 through line 11.Schedule K (565) must include all income and losses from the partnership activities as determined under California laws and regulations. Any differences reported between the federal and California amounts should be related to differences in the tax laws. Do not apply the apportionment formula to the income or losses on Schedule K (565).Line 10 – Enter on line 10, the amount shown on Schedule D-1, Sales of Business Property, line 7. Do not include specially allocated ordinary gains and losses or net gains or losses from involuntary conversions due to casualties or thefts. Instead, report them on line 11b or line 11c.If the partnership has more than one activity and the amount on line 10 is a passive activity amount to the partner, attach a statement to Schedule K-1 (565) that identifies to which activity the IRC Section 1231 gain (loss) relates.
DeductionsLine 1� through Line 1�See the instructions for federal Schedule K (1065), Schedule K-1 (1065), and Schedule K-1 (565) Deductions, line 12 through line 13.Effective for taxable years beginning on or after January 1, 2003, California will follow the revised federal instructions for reporting the sale, exchange or disposition of property for which an IRC Section 179 expense deduction was claimed in prior years by a partnership.California has not conformed to the federal Job Creation and Worker Assistance Act of 2002 that allows taxpayers to take an additional first-year depreciation deduction and Alternative Minimum Tax depreciation adjustment for property placed in service after September 10, 2001.Line 1�a – Charitable ContributionsEnter the total amount of charitable contributions made by the partnership during its taxable year on Schedule K (565) and each partner’s distributive share on Schedule K-1 (565). Attach an itemized list to both schedules showing the amount subject to the 50%, 30%, and 20% limitations.Partners are allowed a deduction for contributions to qualified organizations as provided in IRC Section 170. For taxable years beginning on or after January 1, 2002, California law conforms to the federal law, relating to the denial of the deduction for lobbying activities, club dues, and employee remuneration in excess of one million dollars. California conforms to IRC Section 170(f)(8) substantiation requirement for charitable contributions.Line 1�b – Interest Expense on Investment Debts: This line must be completed whether or not a partner is subject to the investment interest rules. Enter the interest paid or accrued to purchase or carry property held for investment. Property held for investment includes property
Page 16 Form 565 Booklet 2007
that produces portfolio income (interest, dividends, annuities, royalties, etc.). Therefore, interest expense allocable to portfolio income should be reported on line 13b of Schedule K (565) and Schedule K-1 (565), rather than line 13d of Schedule K (565) and Schedule K-1 (565).Property held for investment includes a partner’s interest in a trade or business activity that is not a passive activity to the partnership and in which the partner does not materially participate. An example would be a partner’s working interest in an oil and gas property (i.e., the partner’s interest is not limited) if the partner does not materially participate in the oil and gas activity. Investment interest does not include interest expense allocable to a passive activity. For more information, get form FTB 3526, Investment Interest Expense Deduction.Line 14The information reported on line 14 of the federal Schedule K (1065), and federal Schedule K-1(1065), does not apply to California and therefore there is no line 14.
CreditsLine 15a – Total Withholding, Schedule K-1 (565) onlyIf taxes were withheld by the partnership or if there is a pass-through withholding credit from another entity, the partnership must provide each affected partner (including California residents) a completed Form 592-B. Partners must attach Form 592-B to the front of their California return to claim withheld amounts. Schedule K-1 (565) may not be used to claim this withholding credit.Line 15b through Line 15d These lines relate to rental activities. Use line 15f to report credits related to trade or business activities.California line numbers are different from federal line numbers in this section.Line 15b – Low-Income Housing CreditA credit may be claimed by owners of residential rental projects providing low-income housing (IRC Section 42). Generally, the credit is effective for buildings placed in service after 1986. Get form FTB 3521, Low-Income Housing Credit, for more information.Line 15c – Credits Related to Rental Real Estate Activities Other Than Line 15bReport any information that the partners need to figure credits related to a rental real estate activity, other than the low-income housing credit. Attach to each partner’s Schedule K-1 (565) a statement showing the amount to be reported and the applicable form on which the amount should be reported.Line 15d – Credits Related to Other Rental ActivitiesUse this line to report information that the partners need to figure credits related to a rental activity. Attach to each partner’s Schedule K-1 (565) a statement showing the amount to be reported and the applicable form on which the amount should be reported.Line 15e – Nonconsenting Nonresident Member’s Tax Allocated to All PartnersIf income tax was paid by an LLC on behalf of a member that is a partnership because the general partner in the partnership did not sign form FTB 3832, the amount paid is entered on the member’s Schedule K-1 (568), line 15e. This credit is allocated to all partners according to their partnership interest. Partners must attach a copy of the Schedule K-1 (568), previously issued to their partnership by the LLC as well as the Schedule K-1 (565) issued by their partnership, to their California tax return to claim their share of the tax paid by the LLC on their partnership’s behalf. Line 15f – Other CreditsAttach a statement showing each partner’s allocable share of any credit or credit information that is related to a trade or business activity.Credits that can be reported on line 15f include:• Community Development Financial Institution Deposits Credit. Use
credit code 209.
• Disabled Access Credit for Eligible Small Businesses. Get form FTB 3548.
• Donated Agricultural Products Transportation Credit. Get form FTB 3547.
• Employer Child Care Program/Contribution Credit. Get form FTB 3501.
• Enhanced Oil Recovery Credit. Get form FTB 3546.• Enterprise Zone (EZ) Hiring and Sales or Use Tax Credit. Get form
FTB 3805Z.• Environmental Tax Credit. Get form FTB 3511.• Farmworker Housing Credit – Construction. Use credit code 207.• Farmworker Housing Credit-Loan. Use credit code 208.• Local Agency Military Base Recovery Area (LAMBRA) Hiring and
Sales or Use Tax Credit. Get form FTB 3807.• Manufacturing Enhancement Area (MEA) Hiring Credit. Get form
FTB 3808.• Natural Heritage Preservation Credit. Get form FTB 3503.• Prison Inmate Labor Credit. Get form FTB 3507.• Research Credit. Get form FTB 3523.• Rice Straw Credit. Use credit code 206.• Targeted Tax Area (TTA) Hiring and Sales or Use Tax Credit. Get form
FTB 3809.Line 15f may also include the distributive share of net income taxes paid to other states by the partnership. Subject to limitations of R&TC Section 18001 and R&TC Section 18006, partners may claim a credit against their individual income tax for net income taxes paid by the partnership to another state. The amount of tax paid must be supported by a schedule of payments and evidence of tax liability by the partnership to the other states. Refer partners to Form 540, Schedule S for more information.All of the above credit forms and many other forms are available on our Website at www.ftb.ca.gov.Line 16The information reported on line 16 of the federal Schedule K (1065) and federal Schedule K-1(1065), Foreign Transactions, does not apply to California and therefore there is no line 16.
Alternative Minimum Tax (AMT) Items Line 17a through Line 17f Enter each partner’s distributive share of income and deductions that are adjustments and tax preference items. Get Schedule P (540), Alternative Minimum Tax and Credit Limitations — Residents, Schedule P (540NR), Alternative Minimum Tax and Credit Limitations — Nonresidents or Part-Year Residents, Schedule P (541), Alternative Minimum Tax and Credit Limitations — Fiduciaries, Schedule P (100), Alternative Minimum Tax and Credit Limitations — Corporations, or Schedule P (100W), Alternative Minimum Tax Credit Limitations – Water’s-Edge Filers, to determine amounts and for other information.California law conforms to the existing federal law eliminating the deduction for contributions of appreciated property as an item of tax preference. As a result, taxpayers no longer need to include in their computation of Alternative Minimum Taxable Income the amount by which any allowable deduction for contributions of appreciated property exceeds the taxpayer’s adjusted basis in the contributed property.For additional information, see instructions for federal Schedule K (1065), Alternative Minimum Tax (AMT) Items, line 17a through line 17f. For differences between federal and California law for alternative minimum tax (AMT), see R&TC Section 17062.
Tax-Exempt Income and Nondeductible ExpensesLine 18a through Line 18c – Tax-exempt income and Nondeductible ExpensesEnter the amounts of tax-exempt interest income, other tax-exempt income, and nondeductible expenses from federal Schedule K-1 (1065) line 18. The partnership should give you a description and the amount of your share for each item applicable to California in this category.
Form 565 Booklet 2007 Page 17
DistributionsLine 19a through Line 19b – DistributionsEnter the amounts of cash and marketable securities, and other property from federal Schedule K-1 (1065) line 19.
Other InformationLine �0a and Line �0b – Investment Income and Investment ExpensesThese lines must be completed whether or not a partner is subject to the investment interest rules.Enter on line 20a only the investment income included on line 5, line 6, line 7, and line 11a of Schedule K (565) and Schedule K-1 (565). Enter on line 20b only investment expenses included on line 13d of Schedule K (565) and Schedule K-1 (565). If items of investment income or expenses are included in the amounts that are required to be passed through separately to the partner on Schedule K-1 (565), items other than the amounts included on line 5 through line 9, line 11a, and line 13d of Schedule K-1 (565), give each partner a statement identifying these amounts.Investment income includes gross income from property held for investment, gain attributable to the disposition of property held for investment, and other amounts that are gross portfolio income. Investment income and investment expenses generally do not include any income or expenses from a passive activity.Property subject to a net lease is not treated as investment property because it is subject to the passive loss rules. Do not reduce investment income by losses from passive activities.Investment expenses are deductible expenses (other than interest) directly connected with the production of investment income. Get the instructions for form FTB 3526 for more information.Line �0c – Other informationSee the instructions for the federal Schedule K (1065), line 20c, Other Items and Amounts. For credit recaptures attach a schedule including credit recapture names and amounts.Supplemental InformationThe partnership may need to report supplemental information that is not specifically requested on the Schedule K-1 (565) separately to each partner. If the partnership has supplemental information not included in lines 1-20b, write, “See attached” on line 20c, column b and column d and provide a schedule with the details.Partners may need to obtain the amount of their proportionate interest of aggregate gross receipts, less returns and allowances, from the partnership.Alternative minimum taxable income does not include income, positive and negative adjustments, and preference items attributed to any trade or business of a qualified taxpayer who has aggregate gross receipts, less returns and allowances, during the taxable year of less than $1,000,000 from all trades or businesses in which the taxpayer is an owner or has an ownership interest. The partnership should provide the partner’s proportionate interest of aggregate gross receipts on Schedule K-1 (565), line 20c.For purposes of R&TC Section 17062(b)(4), “aggregate gross receipts, less returns and allowances” means the sum of all of the following:• The gross receipts of the trades or businesses which the taxpayer
owns.• The proportionate interest of the gross receipts of the trades or
businesses which the taxpayer owns.• The proportionate interest of the pass-through entity’s gross receipts
in which the taxpayer holds an interest.“Aggregate gross receipts” means the sum of gross receipts from the production of business income, within the meaning of subdivisions (a) and (c) of R&TC Section 25120, and the gross receipts from the production of nonbusiness income as defined in subdivision (d) of R&TC Section 25120.
For purposes of this section, “pass-through entity” means a partnership (as defined by R&TC Section 17008), an S corporation, a regulated investment company (RIC), a real estate investment trust (REIT), and a REMIC.See R&TC Section 17062 for more information.Also show on line 20c a statement showing each of the following:1. Each partner’s distributive share of business income apportioned to
an EZ, LAMBRA, MEA, or TTA.2. Each partner’s distributive share of business capital gain or loss
included in 1 above.
Analysis – Schedule K (565) onlyLine �1a through Line �1b(�)For the instructions for line 21a through line 21b(2) of Schedule K (565), see the instructions for federal Schedule K (1065), Analysis of Net Income (Loss).
Other Partner Information – Schedule K-1 (565) onlyTable 1Enter the partner’s share of nonbusiness income from intangibles. Because the source of this income must be determined at the partner level, do not enter income in this category in column (e). If the income (loss) for an income item is a mixture of income (loss) in different subclasses (for example, short-term and long-term capital gain), attach a supplemental schedule providing a breakdown of income in each subclass.Enter nonbusiness income from intangibles in Table 1 net of related expenses.Table �The final determination of unity is made at the partner level. If the partnership and the partner are unitary, or if the partnership is uncertain as to whether it is unitary with the partner, it should furnish the information in Table 2.Part A. Enter the partner’s distributive share of the partnership’s business income. The partner will then add that income to its own business income and apportion the combined business income.“Business income’’ is defined as income arising in the regular course of the corporation’s trade or business, Cal. Code Regs., tit. 18 section 25120(a). Business income includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer’s regular trade or business.Part B. Enter the partner’s share of nonbusiness income from real and tangible property that is located in California. This income has a California source, and should also be included on the appropriate line in column (e).Nonbusiness income is all income other than business income.Part C. Enter the partner’s distributive share of the partnership’s payroll, property, and sales factors.
Page 18 Form 565 Booklet 2007
SCHEDULE K FEDERAL/STATE LINE REFERENCESCalifornia Schedule K (565) has been modified to better assist taxpayers to transfer amounts from their federal Schedule K (1065) to their California Schedule K. The modifications consist of reordering the line items to be in a similar format to the federal Schedule K. The new reference chart shown below will assist the taxpayer in transferring the amounts from one schedule to the other. The chart cross-references the boxes on the federal Schedule K (1065) to the appropriate line items on the California Schedule K (565). For detailed instructions, refer to the Schedule K and Schedule K-1 Specific Line Instructions in this booklet.
Federal Schedule K (1065) CA Schedule K (565)
Line Items Line Items
1�
�a�b�c45
6a6b78
9a9b9c
Ordinary business income (loss)Net rental real estate income (loss)Other gross rental income (loss)Expenses from other rental activitiesOther net rental income (loss)Guaranteed paymentsInterest incomeOrdinary dividendsQualified dividendsRoyaltiesNet short-term capital gain (loss)Net long-term capital gain (loss)Collectibles 28% gain (loss)Unrecaptured section 1250
1�
�a�b�c456
789
9b9c
Ordinary income (loss) from trade or business activitiesNet income (loss) from rental real estate activitiesGross income from other rental activitiesLess expensesNet income (loss) from other rental activitiesGuaranteed payments to partnersInterest incomeDividendNot applicableRoyaltiesNet short-term capital gain (loss) Schedule D (565)Net long-term capital gain (loss) Schedule D (565)Not applicableNot applicable
1010b
Net Section 1231 gain (loss)Not applicable
10a10b
Total Gain under IRC Section 1231 (other than due to casualty or theft)Total Loss under IRC Section 1231 (other than due to casualty or theft)
11a11b11c1�
Not applicableOther Income (loss)Not applicableSection 179 deduction (attach Form 4562)
11a11b11c1�
Other Portfolio Income (loss)Total other incomeTotal other lossExpense deduction for recovery property (IRC Section 179 and R&TC Sections 17267.2, 17267.6, and 17268
1�a1�b1�c
1�d
ContributionsInvestment interest expenseSection 59(e)(2) expenditures:(1) TypeNot applicableOther deductions(1) Type
1�a1�b1�c
1�d1�e
Charitable contributionsInvestment interest expense1. Total expenditures to which IRC Section 59(e) election may apply2. Type of expendituresDeductions related to portfolio incomeOther deductions
Other rental real estate creditsOther rental creditsOther credits
15a15b15c
15d15e15f
Withholding on payments to partnerships allocated to all partnersLow-income housing creditCredits other than the credit shown on line 15b related to rentalreal estate activitiesCredit(s) related to other rental activitiesNonconsenting nonresident members’ tax allocated to all partnersOther credits
16a-n Foreign Transactions 16a-n Not applicable
17a17b17c17d17e17f
Post-1986 depreciation adjustmentAdjusted gain or lossDepletion (other than oil and gas)Oil, gas, and geothermal properties – gross incomeOil, gas, and geothermal properties – deductionsOther AMT items
17a17b17c17d17e17f
Depreciation adjustment on property placed in service after 1986Adjusted gain or lossDepletion (other than oil and gas)Gross income from oil, gas, and geothermal propertiesDeductions allocable to oil, gas, and geothermal propertiesOther alternative minimum tax items
30 Refund . if the total of line 24 and line 29 is less than line 27, subtract the total from line 27 . . . . 30
3� penalties and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3� 0032 Total amount due . Add line 24, line 29, and line 31, then subtract line 27 from the result . Make the check or money order payable to the Franchise tax Board . . . . . . . . . . . . . . . . . . . . . . . 32
H Secretary of State (SoS) file numberG Check accounting method: (1) Cash (2) Accrual (3) other (attach explanation)
partnership name (place label within block or type or print) Check box if name changed
DBA
Address (including suite, room, po Box, and pMB no .)
City State Zip Code
Partnership Return of Income TAXABLE YEAR
2007For calendar year 2007 or fiscal year beginning month _______ day ______ year _______, and ending month _______ day _______ year _______ .
3661073
CALIFORNIA FORM
565
For Privacy Notice, get form FTB 1131.
Income
Deduc-tions
Enclose, but do not staple, any payment
Pay-ments
Caution: include only trade or business income and expenses on line 1a through line 22 below . See the instructions for more information .
Telephone
( )
Please Sign Here
PaidPrepar-er’s Use Only
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Signature of general partner Date
Paid Preparer’s SSN/PTIN
Firm’s name (oryours if self-employed) and address
PaidPreparer’s signature
Telephone
( )
Date Check if self-employed
FEIN
-
A principal business activity name (same as federal)
B principal product or service (same as federal)
C principal business activity code (same as federal)
E Date business started in California
F Enter total assets at end of year . See instructions .
$
I Check applicable box (1) initial return (2) FINAL (3) Amended RETURN return
AmountDue orRefund
D FEiN
.,, 00
.,, 00
Side 2 Form 565 C1 2007 3662073
Schedule A Cost of Goods Sold
� inventory at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . � 002 purchases less cost of items withdrawn for personal use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 003 Cost of labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 004 Additional irC Section 263A costs . Attach schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 005 other costs . Attach schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 006 Total . Add line 1 through line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 007 inventory at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 008 Cost of goods sold . Subtract line 7 from line 6 . Enter here and on Side 1, line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 009 a Check all methods used for valuing closing inventory: (�) Cost (2) Lower of cost or market as described in treas . reg . Section 1 .471-4 (3) Write down of “subnormal” goods as described in treas . reg . Section 1 .471-2(c) (4) other . Specify method used and attach explanation ___________________________ b Check this box if the LiFo inventory method was adopted this taxable year for any goods . if checked, attach federal Form 970 . . . . . . . . c Do the rules of irC Section 263A (with respect to property produced or acquired for resale) apply to the partnership? . . . . . . . . . . . . . . . Yes No d Was there any change (other than for irC Section 263A purposes) in determining quantities, cost, or valuations between opening
J What type of entity is filing this return? Check one only:
� General partnership 2 Limited partnership required to pay annual tax (is doing business in California, is registered with SoS, or is organized in California) 3 Limited partnership, limited liability company (LLC), or other entity Not required to pay annual tax (is not doing business in California, is not
registered with SoS, and is not organized in California) 4 rEMiC 5 Limited liability partnership 6 other (See instructions)_____________________________________________________________________________________________
K Enter the maximum number of partners in this partnership at any time during the year . (Be sure to attach a California Schedule K-1 (565) for each partner) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Yes No
L is any partner of the partnership related by blood or marriage to any other partner? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M is any partner of the partnership a trust for the benefit of any person related by blood or marriage to any other partner? . . . . . . . . . . . . N Are any partners in this partnership also partnerships or LLCs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .O Does the partnership meet all the requirements shown in the instructions for Question o? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P is this partnership a partner in another partnership or LLC? if “Yes,” attach a statement with the name(s) and FEiN(s) of each entity . . . .Q Was there a distribution of property or transfer (for example by sale or death) of a partnership interest during the taxable year?
if “Yes,” see the federal instructions concerning an election to adjust the basis of the partnership’s assets under irC Section 754 . . . . R is this partnership a publicly traded partnership as defined in irC Section 469(k)(2)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S is this partnership under audit by the irS or has it been audited in a prior year? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .T (�) For this taxable year, was there a change in control or majority ownership for this partnership (or any legal entity in which it holds
a controlling or majority interest) that owned or leased real property in California? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) For this taxable year, did this partnership (or any legal entity in which it holds a controlling or majority interest) acquire control or
majority ownership of any other legal entity that owned or leased real property in California? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) if this partnership (or any legal entity in which it holds a controlling or majority interest) owned or leased real property in California,
has more than 50 percent of the partnerships interest cumulatively transferred in one or more transactions since March 1, 1975, which was not reported on a previous year’s tax return? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Penalties May Apply – See Instructions.)U (�) Does the partnership have any foreign nonresident partners? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Does the partnership have any nonresident partners? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Were Form 592, Form 592-A, and Form 592-B filed for these partners? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V is this an investment partnership? See General information o, investment partnerships, in the instructions . . . . . . . . . . . . . . . . . . . . . . W is the partnership apportioning income to California using Schedule r? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X Has the partnership included a reportable transaction or Listed transaction with this return?
(See instructions for definitions .) if “Yes,” complete and attach Form 8886 for each transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Y Did this partnership file the Federal Schedule M-3 (Form 1065)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Z is this partnership a direct owner of an entity that filed a federal Schedule M-3? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA Does this partnership have a beneficial interest in a trust or is it a grantor of a trust? Attach name, address, and FEiN . . . . . . . . . . . . .
Form 565 C1 2007 Side 33663073
Schedule K Partners’ Shares of Income, Deductions, Credits, Etc. (a) (b) (c) (d) Distributive share items Amounts from California Total amounts using federal K (�065) adjustments California law
� ordinary income (loss) from trade or business activities . . . . . . . . . . . . . . . . . . � 2 Net income (loss) from rental real estate activities . Attach federal Form 8825 . . . . . 2 3 a Gross income from other rental activities . . . . . . . . . . . . . . . . . . . . . . . . . 3a b Less expenses . Attach schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3b c Net income (loss) from other rental activities . Subtract line 3b
Schedule M-1 Reconciliation of Income per Books With Income per Return. Use total amount under California law . if the partnership completed federal Schedule M-3 (Form 1065), see instructions .
( ) ( )
( ) ( )
( ) ( )
( ) ( )
� Net income (loss) per books . . . . . . . . . . . . . . . . . . . . . . 2 income included on Schedule K, line 1 through
line 11c, not recorded on books this year . itemize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 Guaranteed payments (other than health insurance) . . . . 4 Expenses recorded on books this year not
included on Schedule K, line 1 through line 13e . itemize:
30 Refund . if the total of line 24 and line 29 is less than line 27, subtract the total from line 27 . . . . 30
3� penalties and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3� 0032 Total amount due . Add line 24, line 29, and line 31, then subtract line 27 from the result . Make the check or money order payable to the Franchise tax Board . . . . . . . . . . . . . . . . . . . . . . . 32
H Secretary of State (SoS) file numberG Check accounting method: (1) Cash (2) Accrual (3) other (attach explanation)
partnership name (place label within block or type or print) Check box if name changed
DBA
Address (including suite, room, po Box, and pMB no .)
City State Zip Code
Partnership Return of Income TAXABLE YEAR
2007For calendar year 2007 or fiscal year beginning month _______ day ______ year _______, and ending month _______ day _______ year _______ .
3661073
CALIFORNIA FORM
565
For Privacy Notice, get form FTB 1131.
Income
Deduc-tions
Enclose, but do not staple, any payment
Pay-ments
Caution: include only trade or business income and expenses on line 1a through line 22 below . See the instructions for more information .
Telephone
( )
Please Sign Here
PaidPrepar-er’s Use Only
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Signature of general partner Date
Paid Preparer’s SSN/PTIN
Firm’s name (oryours if self-employed) and address
PaidPreparer’s signature
Telephone
( )
Date Check if self-employed
FEIN
-
A principal business activity name (same as federal)
B principal product or service (same as federal)
C principal business activity code (same as federal)
E Date business started in California
F Enter total assets at end of year . See instructions .
$
I Check applicable box (1) initial return (2) FINAL (3) Amended RETURN return
AmountDue orRefund
D FEiN
.,, 00
.,, 00
Side 2 Form 565 C1 2007 3662073
Schedule A Cost of Goods Sold
� inventory at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . � 002 purchases less cost of items withdrawn for personal use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 003 Cost of labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 004 Additional irC Section 263A costs . Attach schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 005 other costs . Attach schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 006 Total . Add line 1 through line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 007 inventory at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 008 Cost of goods sold . Subtract line 7 from line 6 . Enter here and on Side 1, line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 009 a Check all methods used for valuing closing inventory: (�) Cost (2) Lower of cost or market as described in treas . reg . Section 1 .471-4 (3) Write down of “subnormal” goods as described in treas . reg . Section 1 .471-2(c) (4) other . Specify method used and attach explanation ___________________________ b Check this box if the LiFo inventory method was adopted this taxable year for any goods . if checked, attach federal Form 970 . . . . . . . . c Do the rules of irC Section 263A (with respect to property produced or acquired for resale) apply to the partnership? . . . . . . . . . . . . . . . Yes No d Was there any change (other than for irC Section 263A purposes) in determining quantities, cost, or valuations between opening
J What type of entity is filing this return? Check one only:
� General partnership 2 Limited partnership required to pay annual tax (is doing business in California, is registered with SoS, or is organized in California) 3 Limited partnership, limited liability company (LLC), or other entity Not required to pay annual tax (is not doing business in California, is not
registered with SoS, and is not organized in California) 4 rEMiC 5 Limited liability partnership 6 other (See instructions)_____________________________________________________________________________________________
K Enter the maximum number of partners in this partnership at any time during the year . (Be sure to attach a California Schedule K-1 (565) for each partner) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Yes No
L is any partner of the partnership related by blood or marriage to any other partner? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M is any partner of the partnership a trust for the benefit of any person related by blood or marriage to any other partner? . . . . . . . . . . . . N Are any partners in this partnership also partnerships or LLCs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .O Does the partnership meet all the requirements shown in the instructions for Question o? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P is this partnership a partner in another partnership or LLC? if “Yes,” attach a statement with the name(s) and FEiN(s) of each entity . . . .Q Was there a distribution of property or transfer (for example by sale or death) of a partnership interest during the taxable year?
if “Yes,” see the federal instructions concerning an election to adjust the basis of the partnership’s assets under irC Section 754 . . . . R is this partnership a publicly traded partnership as defined in irC Section 469(k)(2)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S is this partnership under audit by the irS or has it been audited in a prior year? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .T (�) For this taxable year, was there a change in control or majority ownership for this partnership (or any legal entity in which it holds
a controlling or majority interest) that owned or leased real property in California? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) For this taxable year, did this partnership (or any legal entity in which it holds a controlling or majority interest) acquire control or
majority ownership of any other legal entity that owned or leased real property in California? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) if this partnership (or any legal entity in which it holds a controlling or majority interest) owned or leased real property in California,
has more than 50 percent of the partnerships interest cumulatively transferred in one or more transactions since March 1, 1975, which was not reported on a previous year’s tax return? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Penalties May Apply – See Instructions.)U (�) Does the partnership have any foreign nonresident partners? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Does the partnership have any nonresident partners? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Were Form 592, Form 592-A, and Form 592-B filed for these partners? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V is this an investment partnership? See General information o, investment partnerships, in the instructions . . . . . . . . . . . . . . . . . . . . . . W is the partnership apportioning income to California using Schedule r? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X Has the partnership included a reportable transaction or Listed transaction with this return?
(See instructions for definitions .) if “Yes,” complete and attach Form 8886 for each transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Y Did this partnership file the Federal Schedule M-3 (Form 1065)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Z is this partnership a direct owner of an entity that filed a federal Schedule M-3? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA Does this partnership have a beneficial interest in a trust or is it a grantor of a trust? Attach name, address, and FEiN . . . . . . . . . . . . .
Form 565 C1 2007 Side 33663073
Schedule K Partners’ Shares of Income, Deductions, Credits, Etc. (a) (b) (c) (d) Distributive share items Amounts from California Total amounts using federal K (�065) adjustments California law
� ordinary income (loss) from trade or business activities . . . . . . . . . . . . . . . . . . � 2 Net income (loss) from rental real estate activities . Attach federal Form 8825 . . . . . 2 3 a Gross income from other rental activities . . . . . . . . . . . . . . . . . . . . . . . . . 3a b Less expenses . Attach schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3b c Net income (loss) from other rental activities . Subtract line 3b
Schedule M-1 Reconciliation of Income per Books With Income per Return. Use total amount under California law . if the partnership completed federal Schedule M-3 (Form 1065), see instructions .
( ) ( )
( ) ( )
( ) ( )
( ) ( )
� Net income (loss) per books . . . . . . . . . . . . . . . . . . . . . . 2 income included on Schedule K, line 1 through
line 11c, not recorded on books this year . itemize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 Guaranteed payments (other than health insurance) . . . . 4 Expenses recorded on books this year not
included on Schedule K, line 1 through line 13e . itemize:
Schedule M-2 Analysis of Partners’ Capital Accounts
3664073
For Privacy Notice, get form FTB 1131. Schedule K-1 (565) 2007 Side �
Partner’s Share of Income,Deductions, Credits, etc.
For calendar year 2007 or fiscal year beginning month _______ day ______ year _______, and ending month _______ day _______ year _______ .
Partner’s identifying number Partnership’s FEINPartner’s name, address, city, state, and ZIP Code Secretary of State file number Partnership’s name, address, city, state, and ZIP Code
7891073
CALIFORNIA SCHEDULE
K-1 (565)TAXABLE YEAR
2007
A Is this partner a: (�) general partner; or (2) limited partner?B What type of entity is this partner? (�) Individual (5) General Partnership (9) IRA/Keogh/SEP (2) S Corporation (6) Limited Partnership (�0) Exempt Organization (3) Estate/Trust (7) LLP (��) Disregarded Entity (4) C Corporation (8) LLCC Is this partner a foreign partner? . . . . . . . . . . . . . . . . . . . Yes NoD Enter partner’s percentage (without regard to special (i) Before decrease (ii) End of year allocations) of: or termination Profit sharing . . . . . . . . . . . . . .__ __ __ .__ __ __ __% __ __ __ .__ __ __ __%
E Partner’s share of liabilities: Nonrecourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ _________________ Qualified nonrecourse financing . . . . . . . . . . . . . . $ _________________ Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ _________________F Tax shelter registration number __________________________________G (�) Check here if this is a publicly traded partnership as defined in IRC Section 469(k)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Check here if this is an investment partnership (R&TC Sections 17955 and 23040 .1) . . . . . . . . . . . . . . . . . . . . . . . . . .H Check here if this is: (�) A final Schedule K-1 (565) (2) An amended Schedule K-1 (565)I Is this partner a nonresident of California? . . . . . . . . . . Yes No
J Analysis of partner’s capital account: Check the box (�) Tax Basis (2) GAAP (3) Section 704(b) Book (4) Other (explain)(a)
Capital account at beginning of year(b)
Capital contributed during year(c)
Partner’s share of line 3, line 4, and line 7, Form 565, Schedule M-2
(d)Withdrawals and distributions
(e)Capital account at end of year,
combine column (a) through column (d)
( ) Caution: Refer to Partner’s Instructions for Schedule K-1 (565) before entering information from this schedule on your California return . (a) (b) (c) (d) (e) Distributive share items Amounts from California adjustments Total amounts using California federal Schedule K-1 California law . Combine source amounts (1065) col . (b) and col . (c) and credits
� Ordinary income (loss) from trade or business activities . . . . . . . . . . . . . . . . . . . . . . . . .
2 Net income (loss) from rental real estate activities .
3 Net income (loss) from other rental activities . . . . .
8 Net short-term capital gain (loss) . . . . . . . . . . . . . .
9 Net long-term capital gain (loss) . . . . . . . . . . . . . .
�0 a Total Gain under IRC Section 1231 (other than due to casualty or theft) . . . . . . . . . .
b Total Loss under IRC Section 1231 (other than due to casualty or theft) . . . . . . . . . .
�� a Other portfolio income (loss) . Attach schedule . .
b Total other income . Attach schedule . . . . . . . . . .
c Total other loss . Attach schedule . . . . . . . . . . . .
Inco
me
(Los
s)
Side 2 Schedule K-1 (565) 2007 7892073
(a) (b) (c) (d) (e) Distributive share items Amounts from California adjustments Total amounts using California federal Schedule K-1 California law . Combine source amounts (1065) col . (b) and col . (c) and credits
c 1 Total expenditures to which an IRC Section 59(e) election may apply
2 Type of expenditures ___________________ .
d Deductions related to portfolio income . . . . . . . .
e Other deductions . Attach schedule . . . . . . . . . . . �5 a Total withholding (equals amount on Form 592-B if calendar year partnership) . . . . . .
Dividends $ _____________________ Royalties $ ______________________ Other $ _____________________
FOR USE BY APPORTIONING UNITARY PARTNERS ONLY – See instructions .
Table 2 — Partner’s share of distributive items .
A . Partner’s share of the partnership’s business income . See instructions . $_________________
B . Partner’s share of nonbusiness income from real and tangible personal property sourced or allocable to California .
Capital Gains/Losses $ ___________________ Rents/Royalties $ ___________________
Sec . 1231 Gains/Losses $ ___________________ Other $ ___________________
C . Partner’s distributive share of the partnership’s property, payroll, and sales:
Factors Total within and outside California Total within California
Property: Beginning $ $
Ending $ $
Annual Rent Expense $ $
Payroll $ $
Sales $ $
7893073
Page 30 Form 565 Booklet 2007
THIS PAGE INTENTIONALLY LEFT BLANK
Visit our Website:
www.ftb.ca.gov
For Privacy Notice, get form FTB 1131. Schedule K-1 (565) 2007 Side �
Partner’s Share of Income,Deductions, Credits, etc.
For calendar year 2007 or fiscal year beginning month _______ day ______ year _______, and ending month _______ day _______ year _______ .
Partner’s identifying number Partnership’s FEINPartner’s name, address, city, state, and ZIP Code Secretary of State file number Partnership’s name, address, city, state, and ZIP Code
7891073
CALIFORNIA SCHEDULE
K-1 (565)TAXABLE YEAR
2007
A Is this partner a: (�) general partner; or (2) limited partner?B What type of entity is this partner? (�) Individual (5) General Partnership (9) IRA/Keogh/SEP (2) S Corporation (6) Limited Partnership (�0) Exempt Organization (3) Estate/Trust (7) LLP (��) Disregarded Entity (4) C Corporation (8) LLCC Is this partner a foreign partner? . . . . . . . . . . . . . . . . . . . Yes NoD Enter partner’s percentage (without regard to special (i) Before decrease (ii) End of year allocations) of: or termination Profit sharing . . . . . . . . . . . . . .__ __ __ .__ __ __ __% __ __ __ .__ __ __ __%
E Partner’s share of liabilities: Nonrecourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ _________________ Qualified nonrecourse financing . . . . . . . . . . . . . . $ _________________ Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ _________________F Tax shelter registration number __________________________________G (�) Check here if this is a publicly traded partnership as defined in IRC Section 469(k)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Check here if this is an investment partnership (R&TC Sections 17955 and 23040 .1) . . . . . . . . . . . . . . . . . . . . . . . . . .H Check here if this is: (�) A final Schedule K-1 (565) (2) An amended Schedule K-1 (565)I Is this partner a nonresident of California? . . . . . . . . . . Yes No
J Analysis of partner’s capital account: Check the box (�) Tax Basis (2) GAAP (3) Section 704(b) Book (4) Other (explain)(a)
Capital account at beginning of year(b)
Capital contributed during year(c)
Partner’s share of line 3, line 4, and line 7, Form 565, Schedule M-2
(d)Withdrawals and distributions
(e)Capital account at end of year,
combine column (a) through column (d)
( ) Caution: Refer to Partner’s Instructions for Schedule K-1 (565) before entering information from this schedule on your California return . (a) (b) (c) (d) (e) Distributive share items Amounts from California adjustments Total amounts using California federal Schedule K-1 California law . Combine source amounts (1065) col . (b) and col . (c) and credits
� Ordinary income (loss) from trade or business activities . . . . . . . . . . . . . . . . . . . . . . . . .
2 Net income (loss) from rental real estate activities .
3 Net income (loss) from other rental activities . . . . .
8 Net short-term capital gain (loss) . . . . . . . . . . . . . .
9 Net long-term capital gain (loss) . . . . . . . . . . . . . .
�0 a Total Gain under IRC Section 1231 (other than due to casualty or theft) . . . . . . . . . .
b Total Loss under IRC Section 1231 (other than due to casualty or theft) . . . . . . . . . .
�� a Other portfolio income (loss) . Attach schedule . .
b Total other income . Attach schedule . . . . . . . . . .
c Total other loss . Attach schedule . . . . . . . . . . . .
Inco
me
(Los
s)
Side 2 Schedule K-1 (565) 2007 7892073
(a) (b) (c) (d) (e) Distributive share items Amounts from California adjustments Total amounts using California federal Schedule K-1 California law . Combine source amounts (1065) col . (b) and col . (c) and credits
c 1 Total expenditures to which an IRC Section 59(e) election may apply
2 Type of expenditures ___________________ .
d Deductions related to portfolio income . . . . . . . .
e Other deductions . Attach schedule . . . . . . . . . . . �5 a Total withholding (equals amount on Form 592-B if calendar year partnership) . . . . . .
Dividends $ _____________________ Royalties $ ______________________ Other $ _____________________
FOR USE BY APPORTIONING UNITARY PARTNERS ONLY – See instructions .
Table 2 — Partner’s share of distributive items .
A . Partner’s share of the partnership’s business income . See instructions . $_________________
B . Partner’s share of nonbusiness income from real and tangible personal property sourced or allocable to California .
Capital Gains/Losses $ ___________________ Rents/Royalties $ ___________________
Sec . 1231 Gains/Losses $ ___________________ Other $ ___________________
C . Partner’s distributive share of the partnership’s property, payroll, and sales:
Factors Total within and outside California Total within California
Property: Beginning $ $
Ending $ $
Annual Rent Expense $ $
Payroll $ $
Sales $ $
7893073
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Schedule D (565)/FTB 3885P 2007
Depreciation and AmortizationTAXABLE YEAR
2007
7791073
CALIFORNIA FORM
3885P
Assets placed in service after 12/31/06 (depreciation): Depreciation of Assets Amortization of PropertyIntangibles placed in service after 12/31/06 (amortization):
(a) (b) (c) (d) (e) (f) (g) (h) (i) Description of property Date placed Cost or Method Life or Depreciation for Code Period or Amortization to in service other basis of figuring rate this year section percentage this year depreciation
1
1 Enter line 1, column (f) and column (i) totals here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1DepreciationBe sure to make adjustments for any basis differences when calculating Depreciation .2 California depreciation for assets placed in service before January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ________________3 Total California depreciation . Add line 1(f) and line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ________________AmortizationBe sure to make adjustments for any basis differences when calculating Amortization .4 California amortization for intangibles placed in service before January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ________________5 Total California amortization . Add line 1(i) and line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ________________6 Total depreciation and amortization . Add line 3 and line 5 . Enter the total here and on Form 565, Side 1, line 17a,
if from a trade or business, or on federal Form 8825, line 14, if from rental real estate activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ________________7 IRC Section 179 expense election from worksheet, in the instructions, line 12 . . . . . . . . . . . . . . . . . . . . . . . 7 ________________8 Carryover of disallowed deduction to 2008 . Enter line 13 from worksheet, in the instructions, here . . . . . . . 8 ________________
Capital Gain or LossTAXABLE YEAR
2007CALIFORNIA SCHEDULE
D (565)
(a) (b) (c) (d) (e) (f) Description of property, Date acquired Date sold Sales price Cost or other basis Gain (loss) Example, 100 shares 7% preferred of ‘’Z’’ Co. (mo., day, yr.) (mo., day, yr.) See instructions. See instructions. (d) minus (e)
1
1 Enter line 1, column (f) totals here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ________________2 Capital gain from installment sales, from form FTB 3805E, line 26 or line 37 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ________________3 Partnership’s share of net capital gain (loss), including gains (losses) from LLCs, partnerships, fiduciaries, and S corporations . . . . . 3 ________________4 Capital gain distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ________________5 Net capital gain (loss) . Add line 1, line 2, line 3, and line 4 . Enter total here and on Schedule K, line 8 and line 9, and each partner’s
Name as shown on return Secretary of State (SOS) file no.
-
Name as shown on return Secretary of State (SOS) file no.
FEIN
-
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Schedule D (565)/FTB 3885P Instructions 2007 Page 37
Instructions for Schedule D (565)Capital Gain or Loss
General InformationIn general, California law conforms to the Internal Revenue Code (IRC) as of January 2005. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to our Website at www.ftb.ca.gov and search for conformity. Additional information can be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540 or 540NR), and the Business Entity tax booklets.The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the tax booklets. Taxpayers should not consider the tax booklets as authoritative law.
Internet AccessYou can download, view, and print California tax forms and publications from our Website at www.ftb.ca.gov.Access other state agencies’ Websites through the State Agencies Directory on California’s Website at www.ca.gov.
PurposeUse Schedule D (565), Capital Gain or Loss, to report the sale or exchange of capital assets, except capital gains (losses) that are specially allocated to any partners. Do not use this form to report the sale of business property. For sales of business properties, use California Schedule D-1, Sale of Business Property.Enter specially allocated capital gains (losses) received from limited liability companies (LLCs) classified as partnerships, partnerships, S corporations, and fiduciaries on Schedule D (565), line 3. Enter capital gains (losses) that are specially allocated to partners on Schedule K-1 (565), Partner’s Share of Income, Deductions, Credits, etc. Do not include these amounts on Schedule D (565). See the instructions for
Schedule K (565) and Schedule K-1 (565) for more information. Also, refer to the instructions for federal Schedule D (1065).
Nonresident and Part-Year Resident Partners, get FTB Pub. 1100, Taxation of Nonresidents and Individuals Who Change Residency.With the enactment of AB 1115 (Stats. 2001, Ch 920) capital loss carry-over and capital loss limitations for nonresident partners and part-year resident partners, for the portion of the year they were nonresidents, are determined based upon California source income and loss items only for the computation of their California taxable income. Moreover, the character of their gains and losses on the sale or exchange of property used in trade or business or certain involuntary conversions (IRC Section 1231) are determined for purposes of calculating their California taxable income by netting California sources Section 1231 gains and losses only. California law conforms to federal law for the recognition of gain on a constructive sale of property in which the partnership held an appreciated interest.
Qualified Small Business StockR&TC Section 18152.2 is similar to IRC Section 1202 regarding the exclusion of 50% of the gain on the sale of qualifying small business stock originally issued after August 10, 1993, that was held for more than five years. However, for California purposes, at least 80% of the issuing corporation’s payroll must be attributable to employment located within California, and at least 80% of the value of the corporation’s assets must be used by the corporation to actively conduct one or more qualified trades or businesses in California.R&TC Section 18038.5 also provides for the deferral of gain from the sale of small business stock that has been held for six months or more, if qualified replacement stock is purchased within 60 days after the sale giving rise to the gain. Report gain deferred from the sale of qualified small business stock in accordance with the instructions contained in Revenue Procedure 98-48.The partnership also must separately state the amount of the gain that qualifies for the 50% exclusion under R&TC Section 18152.5 on Schedule K, line 11. Each partner must determine if he or she qualifies for the gain at the partner level.
Instructions for Form FTB 3885PDepreciation and Amortization
A PurposeUse form FTB 3885P, Depreciation and Amortization, to compute depreciation and amortization allowed as a deduction on Form 565, Partnership Return of Income. Attach form FTB 3885P to Form 565.Depreciation is the annual deduction allowed to recover the cost or other basis of business or income producing property with a determinable useful life of more than one year. Land is not depreciable.Amortization is an amount deducted to recover the cost of certain capital expenses over a fixed period.In general, California conforms to federal law for assets placed in service on or after January 1, 1987. See California Revenue and Taxation Code (R&TC) Section 17250.
B Federal/State Calculation DifferencesCalifornia law has not always conformed to federal law with regard to depreciation methods, special credits, or accelerated write-offs. Consequently, the recovery periods and the basis on which the depreciation is calculated may be different from the amounts used for federal purposes. Reportable differences may occur if all or part of your assets were placed in service:
• Before January 1, 1987: California disallowed depreciation under the federal Accelerated Cost Recovery System (ACRS). Continue to calculate California depreciation in the same manner as in prior years for those assets.
• On or after January 1, 1987: California provides special credits and accelerated write-offs that affect the California basis for qualifying assets. California does not conform to all the changes to federal law enacted in 1993. Therefore, the California basis or recovery periods may be different for some assets.
Additional differences may occur for the following:• Luxury Automobile Depreciation: California generally conforms
to the federal 2003 increase (IRC Section 280F) for the limitation on luxury automobile depreciation. However, California does not conform to IRC Section 168(k) provisions (30% and 50% additional first year depreciation). In addition, SUVs and minivans built on a truck chassis are included in the definition of trucks and vans when applying the 6,000 pound gross weight limit.
Page 38 Schedule D (565)/FTB 3885P Instructions 2007 (REV 05-08)
• Amortization of Certain Intangibles (IRC Section 197): Property classified as Section 197 property under federal law is also Section 197 property for California purposes. There is no separate California election required or allowed. However, for Section 197 property acquired before January 1, 1994, the California adjusted basis as of January 1, 1994, must be amortized over the remaining federal amortization period.
• Qualified Indian reservation property: California has not conformed to the accelerated recovery periods available under the Alternative Depreciation System (ADS) for such property.
• Grapevines subject to Phylloxera or Pierce’s Disease: For California purposes, replacement grapevines may be depreciated using a recovery period of five years instead of ten years.
This list is not intended to be all-inclusive of the federal and state differences. For additional information, please refer to California’s R&TC.
Specific Line InstructionsLine 1 – California depreciation for assets placed in service after December 31, 2006, and amortization for intangibles placed in service after December 31, 2006Complete column (a) through column (i) for each asset or group of assets or property placed in service after December 31, 2006. Enter the column (f) totals on line 1(f). Enter the column (i) totals on line 1(i).
Line 2 – California depreciation for assets placed in service before January 1, 2007Enter total California depreciation for assets placed in service prior to January 1, 2007, taking into account any differences in asset basis or differences in California and federal tax law.
Line 4 – California amortization for intangibles placed in service before January 1, 2007Enter total California amortization for intangibles placed in service prior to January 1, 2007, taking into account any differences in asset basis or differences in California and federal tax law.
Assets with a Federal Basis Different from California BasisSome assets placed in service on or after January 1, 1987, will have a different adjusted basis for California purposes due to the credits claimed or accelerated write-offs of the assets. Review the list of depreciation and amortization items in the instructions for Schedule CA (540), California Adjustments — Residents, and Schedule CA (540NR), California Adjustments — Nonresidents or Part-Year Residents. If the partnership has any other adjustments to make, get FTB Pub. 1001, Supplemental Guidelines to California Adjustments, for more information.
Line 6 – Total Depreciation and AmortizationAdd line 3 and line 5. Enter the total on line 6 and on Form 565, Side 1, line 17a.If depreciation or amortization is from more than one trade or business activity, or from more than one rental real estate activity, the partnership should separately compute depreciation for each activity. Use the depreciation computed on this form to identify the net income for each activity. Report the net income from each activity on an attachment to Schedule K-1 (565), Partner’s Share of Income, Deductions, Credits, etc., for purposes of passive activity reporting requirements. Use California amounts to determine the depreciation amount to enter on line 14 of federal Form 8825, Rental Real Estate Income and Expenses of Partnership or an S Corporation.
Line 7Enter the Internal Revenue Code (IRC) Section 179 expense election amount from line 12 of the following worksheet.These limitations apply to the partnership and each partner.
Election to Expense Certain Tangible Property (IRC Section 179) Worksheet
Follow the instructions on federal Form 4562 or 4562-FY for listed property.
1 Maximum dollar limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 __________________ 2 Total cost of IRC Section 179 property placed in service during the taxable year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 __________________ 3 Threshold cost of IRC Section 179 property placed in service during the taxable year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 __________________ 4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 __________________ 5 Dollar limitation for taxable year. Subtract line 4 from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 __________________
(a) (b) (c) Description of property Cost Elected cost
6
7 Listed property. Use federal Form 4562 or 4562-FY, Part V, line 29. Make any adjustments for California law and basis differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 __________________ 8 Total elected cost of IRC Section 179 property. Add amounts in column (c), line 6 and line 7 . . . . . . . . . . . . . . . . . . . . . . 8 __________________ 9 Tentative deduction. Enter the smaller of line 5 or line 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 __________________ 10 Carryover of disallowed deduction from 2006. See instructions for line10 through line 13 on federal Form 4562 or 4562-FY 10 __________________ 11 Income limitation. Enter the smaller of line 5 or the aggregate of the partnership’s items of income and expense described in IRC Section 702(a) from any business actively conducted by the partnership, other than credits, tax-exempt IRC Section 179 expense deduction, and guaranteed payments under IRC Section 707(c) . . . . . . . . . . . . . . . 11 __________________ 12 IRC Section 179 expense deduction. Add line 9 and line 10, but do not enter more than line 11. Enter on Schedule K (565), line 12 and on form FTB 3885P, line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 __________________ 13 Carryover of disallowed deduction to 2008. Add line 9 and line 10 and subtract line 12. Enter here and on line 8 of form FTB 3885P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 __________________
$ 25,000
$200,000
LP, LLP, or REMIC name FEIN
DBA Secretary of State (SOS) file number
Address (including suite, room, PO Box or PMB no.)
City State ZIP Code
Contact Telephone no.
( )
Instructions for Form FTB 3538Payment for Automatic Extension for LPs, LLPs, and REMICs
What’s NewRound Cents To Dollars Beginning with the 2007 tax forms, round cents to the nearest whole dollar. For example, round $50.50 up to $51 or round $25.49 down to $25.
General InformationCalifornia does not require the filing of written extensions. If a partnership cannot file Form 565, Partnership Return of Income, by the return’s due date, the partnership is granted an automatic six-month extension.If the tax return is filed by the 15th day of the 10th month following the close of the taxable year (fiscal year) or by October 15, 2008 (calendar year), the extension will apply.However, an extension of time to file the limited partnership (LP), limited liability partnership (LLP), or real estate mortgage investment conduit (REMIC) return is not an extension of time to pay the $800 annual tax.Only use form FTB 3538 if both of the following apply:• The LP, LLP, or REMIC cannot file Form 565 by the due date• Tax is owed for 2007If tax is not owed, there is nothing to file at this time. Do not complete or mail this voucher. If tax is owed or you are paying the $800 annual tax, complete the voucher below. Make your check or money order payable to the “Franchise Tax Board.” Write the SOS file number, FEIN, and “2007 FTB 3538” on the check or money order. Mail the payment voucher along with the check or money order to the Franchise Tax Board by the 15th day of the 4th month following the close of the taxable year (fiscal year) or April 15, 2008 (calendar year), to avoid a late payment penalty. Make all checks or money orders payable in U.S. dollars and drawn against a U.S. financial institution.
How to Complete Form FTB 3538Enter all the information requested on this payment voucher. To ensure the timely and proper application of this payment to the partnership’s account, enter the federal employer identification number (FEIN) and the Secretary of State (SOS) file number (assigned upon registration with the SOS).Private Mail BoxInclude the Private Mail Box (PMB) in the address field. Write the acronym “PMB” first, then the box number. Example: 111 Main Street PMB 123.
Where to FileDetach the payment voucher from the bottom of the page. Enclose, but do not staple, your payment to the voucher and mail to: FRANCHISE TAX BOARD
PO BOX 942857 SACRAMENTO CA 94257-0651
Penalties and InterestAn extension of time to file a return is not an extension of time to pay the tax. If the entity fails to pay its total tax liability by the original due date, the entity will incur a late payment penalty plus interest. To avoid late payment penalties and interest, the tax liability must be paid by the 15th day of the 4th month, following the close of the taxable year.
Internet AccessYou can download, view, and print California tax forms and publications from our Website at www.ftb.ca.gov.Access other state agencies’ Websites through the State Agencies Directory on California’s Website at www.ca.gov.
6211073
Payment for Automatic Extension for LPs, LLPs, and REMICs
CALIFORNIA FORM
3538 (565)
-
TAXABLE YEAR
2007For calendar year 2007 or fiscal year beginning month_______ day_______ year _______, and ending month_______ day_______ year_______ .
-
Amount of payment
FTB 3538 2007
If amount of payment is zero, do not mail form }
Fiscal year: File and Pay by the 15TH DAY OF 4TH MONTH FOLLOWING THE CLOSE OF THE TAXABLE YEAR. Calendar year: File and pay by April 15, 2008.
DETACH HERE IF NO PAYMENT IS DUE, DO NOT MAIL THIS FORM DETACH HERE
-.,, 00
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Partner’s Instructions for Schedule K-1 (565)What’s NewRevised Schedule K-1 – The California Schedule K-1 (565) line items have been revised to be in a similar format with the federal Schedule K-1 (1065). For more information, get the Schedule K Federal/State Line References chart on page 18, inside the Form 565, Partnership Tax Booklet. Round Cents To Dollars – Beginning with the 2007 tax forms, round cents to the nearest whole dollar. For example, round $50.50 up to $51 or round $25.49 down to $25. If you do not round, FTB will disregard the cents. This change helps process your returns quickly and accurately.
General InformationIn general, California law conforms to the Internal Revenue Code (IRC) as of January 2005. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to our Website at www.ftb.ca.gov and search for conformity. Additional information can be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540 or 540NR), and the Business Entity tax booklets.The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the tax booklets. Taxpayers should not consider the tax booklets as authoritative law.For taxable years beginning on or after January 1, 2003, California will follow the revised federal instructions (with some exceptions) for reporting the sale, exchange or disposition of an asset for which an IRC Section 179 expense was claimed in a prior year by a partnership, limited liability company or S corporation.Partners should follow federal reporting requirements as detailed in federal Form 1065, U.S. Return of Partnership Income, and federal Form 4797, Sale of Business Property instructions.
A PurposeThe partnership uses Schedule K-1 (565) to report your distributive share of the partnership’s income, deductions, credits, etc. Please keep the Schedule K-1 (565) for your records. Information from the Schedule K-1 (565) should be used to complete your California return. However, do not file the schedule with your California return. The partnership has filed a copy with the Franchise Tax Board (FTB).As a partner of the partnership, you are subject to tax on your distributive share of the partnership income, whether or not distributed.The amount of loss and deduction you are allowed to claim on your California return may be less than the amount reported on Schedule K-1 (565). Generally, the amount of loss and deduction you are allowed to claim is limited to your basis in the partnership and the amount for which you are considered at-risk. If you have losses, deductions, or credits from a passive activity, you must also apply the passive activity loss and credit rules. It is the partner’s responsibility to consider and apply any applicable limitations. See Specific Instructions C, Loss Limitations.You should also read the federal Schedule K-1 (1065) instructions before completing your California return with this Schedule K-1 (565) information.For more information on the treatment of partnership income, deductions, credits, etc., get the following federal publications: — Publication 541, Tax Information on Partnerships— Publication 535, Business ExpensesAny information returns required for federal purposes under Internal Revenue Code (IRC) Sections 6038, 6038A, and 6038B are also required for California purposes. Attach the information returns to your California return when filed. If the information returns are not provided, penalties may be imposed under Revenue and Taxation Code (R&TC) Sections 19141.2 and 19141.5.Internet Access You can download, view, and print California tax forms and publications from our Website at www.ftb.ca.gov.
Access other state agencies’ Websites through the State Agencies Directory on California’s Website at www.ca.gov.
B DefinitionsGeneral PartnerAn individual or entity owning interest in a partnership who is personally liable for partnership debts and who is authorized to act on behalf of the partnership.Limited PartnerAn individual or entity owning an interest in a partnership whose potential personal liability for partnership debts is limited to the amount of money or other property that the partner contributed or is required to contribute to the partnership.Nonrecourse LoansLiabilities of the partnership for which none of the partners have assumed any personal liability.Qualified Nonrecourse FinancingAny financing for which no one is personally liable for repayment that is borrowed for use in an activity of holding real property and that is loaned or guaranteed by a federal, state, or local government, or borrowed from a “qualified person.”California Business SitusThe place at which intangible personal property is employed as capital in California; or the place where the property is located if possession and control of the property is localized in connection with the taxpayer’s business that is within this state, so that substantial use or value attaches to the property. ApportionmentThe process by which business income from a trade or business conducted in two or more states (an apportioning trade or business) is divided between taxing jurisdictions. The apportionment percentage is determined by reference to the property (including rent), payroll, and sales factors of the apportioning trade or business.UnitaryA method of taxation by which all of the activities comprising a single trade or business are viewed as a single unit, regardless of whether those activities are conducted by divisions of a single entity or by commonly owned or controlled entities. For more information about unitary business principles, get FTB Pub. 1061, Guidelines for Corporations Filing a Combined Report.ElectionThe choice of a particular accounting method for tax reporting purposes. Generally, the partnership decides how to compute taxable income from its operations. For example, it chooses the accounting method and depreciation methods it will use.However, certain elections are made separately on your California return and not by the partnership. These elections are made under the following IRC Sections, to which the R&TC conforms:• IRC Section 108(b)(5) (income from discharge of indebtedness)• IRC Section 617 (deduction and recapture of certain mining exploration
expenditures, paid or incurred)Additional DefinitionsFor definitions of a partnership, general partnership, limited partnership, limited liability partnership, etc., see the instructions for Form 565, Partnership Return of Income, or the instructions for federal Form 1065, U.S. Partnership Return of Income.
C Reporting Information from Columns (d) and (e)If the partnership derives income from activities conducted both within and outside California, the partnership will complete Schedule R, Apportionment and Allocation of Income, to determine the partnership income from California sources. Resident partners will use only the information in column (c) and column (d) to report their share of the partnership’s income or loss.Nonresident, corporate, and other entity partners must report their share of income apportioned or allocated to California as indicated on Schedule K-1 (565). Special rules apply if a partner and the partnership engage in a unitary business. See Cal. Code Regs., tit. 18 sections 17951 and 25137-1 for more information. Also see General Information E, Unitary Partners. Nonresident,
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corporate, and other entity partners (other than partners that are unitary with the partnership) will use the information in columns (c), (d), and (e) to report their distributive share of income (losses) or credits. Residents, part-year residents, and some nonresidents may qualify for a credit for taxes paid to other states on income that is apportioned or allocated to a state other than California. For more information get Form 540, Schedule S, Other State Tax Credit.Nonapportioning partnerships do not need to fill out column (e) on Schedule K-1 (565) if the partner is a resident and the “No” box is checked on Question I. However, the final determination of residency is made at the partner level. If the partnership is uncertain as to the residency status of the partner, it should fill out column (e) for that partner.Inconsistent Treatment of ItemsGenerally, partners must report tax items shown on their Schedule K-1s and any attached schedules, the same way the partnership treated the items on its tax return. If the treatment on a partner’s original or amended tax return is inconsistent with the partnership’s treatment, or if the partnership has not filed a tax return, the partner must attach a statement with its original or amended tax return to identify and explain any inconsistency or to note that a partnership tax return has not been filed. If a partner is required to attach this statement but fails to do so, the partner may be subject to an accuracy related penalty.
D Income Not from a Trade Or Business of the Partnership (Nonbusiness Income)
If the partnership has income that is not from a trade or business (nonbusiness income), the source of that nonbusiness intangible income will be determined at the partner level. However, nonbusiness income from real or tangible personal property located in California, such as rents, royalties, gains, or losses is California source income (Cal. Code Regs., tit. 18 section 17951-3 and R&TC Sections 25124 and 25125). This information should be included on the appropriate line of column (e), as well as in Table 2, Part B, if the partnership believes it is unitary with the partner or if the partnership is uncertain whether it is unitary with the partner. Non-unitary partners should ignore the information in Table 2 and use column (e).The source of income from all nonbusiness intangibles will depend on whether the partner is required to apportion its income and whether the partner is a corporation. In most cases, income from nonbusiness intangible property is sourced at the residence or commercial domicile of the partner.However, for individuals, estates, and trusts that are not required to apportion income, income from nonbusiness intangibles will have a California source if the intangible has acquired a California business situs. For example, a nonresident pledges stocks, bonds, or other intangible personal property in California. This pledge is security for the payment of debt, taxes, or other liabilities incurred for a business in the state. The pledged property will acquire a business situs in California. Another example is a nonresident who maintains an office and bank account in California for the business activities in this state. The bank account will acquire a business situs in California. See Cal. Code Regs., tit. 18 section 17951-2 and R&TC Section 17952. If the intangible income is determined to have a business situs by the partnership, the intangible income will be included in column (e).If the partner is an apportioning taxpayer or a corporation, Cal. Code Regs., tit. 18 sections 17951-4 and 25137-1 require that nonbusiness income from intangibles be allocated in accordance with the rules of R&TC Sections 25126 and 25127.Because the source of intangible nonbusiness income is dependent upon the status of the individual partner, that income is not included in column (e) and is entered only in Table 1. The partner must determine the source of such income by applying the rules described above.
E Unitary PartnersThe following rules apply to corporations, individuals and other entities that conduct a trade or business that is unitary with the partnership’s trade or business (see Cal. Code Regs., tit. 18 section 17951, incorporating the provisions of section 25137 and regulations thereunder).Unitary partners cannot use the California source information reflected in column (e). Such partners must use the information in Table 1 and Table 2 as described below and in Specific Line Instructions G and H.The partner’s distributive share of partnership items is determined by
applying the partnership rules in R&TC Sections 17851 through 17858. The determination of the portion of the distributive share of business and nonbusiness income that has its source in California or, that is includible in the partner’s business income subject to apportionment is made in accordance with Cal. Code Regs., tit. 18 section 25137-1 if the partner, or the partnership, or both, have income from sources within and outside this state. The partner, in computing net income for its tax accounting period, must include its distributive share of partnership items referred to above for any partnership taxable year ending within or with the partner’s tax accounting period.
Distributive Items of Business IncomeApportionment of Business Income – Unitary BusinessIf the partnership’s activities and the partner’s activities constitute a unitary business under established standards (other than ownership requirements), the combined business income of this single trade or business apportioned to California is determined by combining the partner’s distributive share of the partnership’s apportionment factors with the factors of the partner for any partnership year ending within the partner’s tax accounting period. Combined business income is then apportioned by using a 3- or 4-factor formula consisting of the combined property, payroll, and a single or double-weighted sales factor. Use of a 3-factor formula depends upon whether combined gross business receipts (partner’s share of the partnership’s gross business receipts plus the partner’s own gross business receipts) are more than 50% from agricultural, extractive, banking, or savings and loans and other financial business activities.If you are a partner that is unitary with the partnership, use Table 2 to compute your factors, applying the rules shown below (see Cal. Code Regs., tit. 18 section 25137-1 for examples). Partners that are unitary with the partnership should perform the following steps:1. Combine your distributive share of the partnership’s business income
with your own business income to determine total business income.2. Compute property, payroll, and sales factors by combining your share of
the partnership’s factors from Table 2, Part C, with your own factors as explained below.
3. Apply the apportionment factor determined in Step 2 to the total business income determined in Step 1 to arrive at business income apportioned to this state.
1. Unitary Partner’s Computation of Property Factor Use Schedule R to compute the numerator and the denominator of the
property factor. Adjust factors in accordance with Cal. Code Regs., tit. 18 sections 25130 and 25131. Also apply the following special rules:A. Include in the denominator of your property factor your distributive
share of the partnership’s beginning and ending balances of real and tangible personal property owned (if rented, multiply net annual rents paid by 8) and used during the tax accounting period in the regular course of business. See Table 2, Part C.
B. Include in the numerator of your property factor the value of such property that is described in 1A (above) that is located in California. See Table 2, Part C.
C. See Cal. Code Regs., tit. 18 section 25137-1(f)(1)(B) for examples of how to avoid duplication of the value of property that is rented by the partner to the partnership or vice versa.
2. Unitary Partner’s Computation of Payroll Factor Use Schedule R to compute the numerator and the denominator of the
payroll factor in accordance with Cal. Code Regs., tit. 18 sections 25132 and 25133. Apply the following special rules:A. Include in the denominator of your payroll factor your distributive
share of the partnership’s payroll used to produce business income. See Table 2, Part C.
B. Include in the numerator any such payroll described in 2A that is applicable to California. See Table 2, Part C.
3. Unitary Partner’s Computation of the Sales Factor Compute the numerator and denominator of the sales factor in
accordance with Cal. Code Regs., tit. 18 sections 25134 to 25136. Apply the following special rules:A. Include in the denominator of the sales factor your distributive share
of the partnership’s sales that give rise to business income. See Table 2, Part C.
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B. Include in the numerator of your sales factor the amount of such sales described in 3A (above) attributable to California.
C. Eliminate intercompany sales as one of the following:• Sales by the partner to the partnership to the extent of the
partner’s interest in the partnership.• Sales by the partnership to the partner not to exceed the
partner’s interest in all partnership sales. See Cal. Code Regs., tit. 18 section 25137-1(f)(3).
Distributive Items of Nonbusiness Income for a Unitary PartnerIncome in Table 2, Part B, is from a California source under R&TC Sections 25124 and 25125. Because Schedule K-1 (565), column (e) data is not utilized by a unitary partner, unitary partners must make certain to separately include such items as California source income.
Specific InstructionsA Questions and ItemsThe partnership completes the questions and items on the Schedule K-1 (565) for all partners. Partners should follow federal reporting requirements as detailed in federal Form 1065, U.S. Return of Partnership Income instructions, and federal Form 4797, Sale of Business Property instructions.
B Schedule K-1 (565)Important Note to Partners: If your Schedule K-1 (565) reports losses and/or deductions, you must first apply the basis, at-risk, and the passive activity loss limitations before such losses/deductions can be deducted on your California return. See Specific Instructions C, Loss Limitations, below. Also, see IRC Section 705(a) for information on how to compute basis.If your return is ever examined, you may be required to provide your computations and the supporting documents for your partnership interest.If you are an individual partner, the amounts in column (c), California adjustments, and column (d), Total amounts using California law, that are from nonpassive activities must be reported on the appropriate California form or schedule; such as, Schedule D, Capital Gain or Loss , Schedule D-1, Sales of Business Property, Schedule CA (540), California Adjustments — Residents, or Schedule CA (540NR), California Adjustments — Nonresidents or Part-Year Residents.Amounts in column (e), California source amounts and credits, that are from passive activities must be reported on form FTB 3801, Passive Activity Loss Limitations, form FTB 3801-CR, Passive Activity Credit Limitations, or form FTB 3802, Corporate Passive Activity Loss and Credit Limitations. Use the related worksheets to figure any passive loss limitations. If the partnership knows that you are a California resident it may leave column (e) blank. California residents are subject to tax on their entire taxable income shown in column (d) (R&TC Section 17041).If you are not an individual partner, report the amounts as instructed on your California return.If you have losses, deductions, credits, etc., from a prior year that were not deductible or usable because of certain limitations, they may be taken into account in determining your net income, loss, etc., for this year. However, do not combine the prior-year amounts with any amounts shown on this Schedule K-1 (565) to get a net figure. Instead, report the amounts on an attached schedule, statement, or form on a year-by-year basis. See the instructions for federal Schedule K-1 (1065) for more information.
C Loss LimitationsThe amounts shown on line 1 through line 3 of your Schedule K-1 (565) reflect your distributive share of income or loss from the partnership’s business or rental operations. If you have losses from the partnership, you should be aware that there are three potential limitations imposed on losses before you may deduct losses on your tax return. These limitations and the order in which they must be applied are:• Basis limitations (IRC Section 704)• At-risk limitations (IRC Section 465)• Passive activity loss and credit limitations (IRC Section 469).Each of these limitations is discussed separately below.Other limitations may apply to specific deductions such as the investment interest expense deduction. These limitations on specific deductions
generally apply before the basis, at-risk, and passive loss limitations.Basis RulesGenerally, California tax law conforms to federal tax law concerning basis limitations. You may not claim your share of a partnership loss (including a capital loss) that is greater than the adjusted basis of your partnership interest at the end of the partnership’s taxable year.The partnership is not responsible for keeping the information needed to compute the basis of your partnership interest. Although the partnership does provide you with an analysis of the changes to your capital account on your Schedule K-1 (565), Item J, that information is based on the partnership’s books and records and should not be used to compute your basis.You can compute the basis of your partnership interest by adding items that increase your basis and then subtracting items that decrease your basis.Items that increase your basis may include the following:• Money and the adjusted basis of property you contributed to the
partnership.• Your distributive share of the partnership’s income.• Your distributive share of the increase in the liabilities of the partnership
(and/or your individual liabilities caused by your assumption of partnership liabilities).
Items that decrease your basis, but not below zero, may include the following:• Money and the adjusted basis of property distributed to you.• Your share of the partnership’s losses.• Your share of the decrease in the liabilities of the partnership
(and/or your individual liabilities assumed by the partnership).This is not a complete list of items and factors that determine basis. Get federal Publication 541 for a complete discussion of how to determine the basis of your partnership interest.At-Risk RulesThe at-risk rules generally limit the amount of loss, (including loss on disposition of assets) and other deductions (such as IRC Section 179, R&TC Sections 17267.2, 17267.6, and 17268 deduction) that you can claim to the amount you could actually lose in the activity.If you have: (1) a loss or other deduction from an activity carried on as a trade or business or for the production of income by the partnership; and (2) amounts in the activity for which you are not at-risk, you will have to complete federal Form 6198, At-Risk Limitations, to figure the allowable loss to report on your return. Complete federal Form 6198 using California amounts.See the instructions for federal Schedule K-1 (1065), At-Risk Limitations, and federal Publication 925, Passive Activity and At-Risk Rules, for more information.Passive Activity Loss and Credit RulesIRC Section 469 limits the deduction of certain losses and credits. California law generally conforms to this federal provision. These rules apply to partners who have a passive activity loss or credit for the taxable year.For California purposes, the passive loss limitations apply to:1. Individuals2. Estates3. Trusts (other than grantor trusts)4. Closely held corporations5. S CorporationsEven though the passive loss rules do not apply to grantor trusts, partnerships, and limited liability companies, they do apply to the owners of these entities.A passive activity is generally a trade or business activity in which the partner does not materially participate or a rental real estate activity in which the partner does not actively participate. A partnership may have more than one activity. Each partner must apply the passive activity loss and credit limitations on an activity-by-activity basis.Individuals, estates and trusts, and S corporations must complete form FTB 3801 to calculate the allowable passive losses, and form FTB 3801-CR to calculate the allowable passive credits. Corporations must complete form FTB 3802.
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The amounts reported on Schedule K-1 (565), line 1 and line 15f are normally passive activity income (loss) or credits from the trade or business of the partnership if you are a limited partner, or if you are a general partner who did not materially participate in the trade or business activities of the partnership. The amounts reported on Schedule K-1 (565), line 2, line 3, and line 15b are from rental activities of the partnership and are passive activity income (loss) or credits to all partners. There is an exception to this rule for losses incurred by qualified investors in qualified low-income housing projects. The partnership will identify any of these qualified amounts on an attachment for line 2.The passive loss rules apply separately to the items attributable to each publicly traded partnership (PTP) that is not treated as a corporation under IRC Section 7704. Thus, partners who do not materially participate in the operations of a PTP are allowed to deduct their share of the PTP’s losses only to the extent of passive income from the same PTP or when the entire interest is sold, IRC Section 469(k). See the instructions for form FTB 3801 and form FTB 3802 for the rules to calculate and report income, gains, and losses from passive activities that you held through each PTP you owned during the taxable year.See the instructions for federal Schedule K-1 (1065), Passive Activity Limitations, and federal Publication 925 for more information.
D Investment Partnership IncomeIf you are a nonresident individual, the amounts in column (e) will generally not be taxable by California (R&TC Section 17955). However, nonresident individuals will be taxed on their distributive share of California source income from an investment partnership if the income from the qualifying investment securities is interrelated with either of the following:• Any other business activity of the nonresident partner.• Any other entity in which the nonresident partner owns an interest that is
separate and distinct from the investment activity of the partnership and that is conducted in California.
If you are a corporate partner, the amounts in column (e) will also generally not be taxable in California provided the income from the partnership is the corporation’s only California source income. However, if the corporation does either of the following:• Participates in the management of the investment activities of the
partnership or is engaged in a unitary business with another corporation, or partnership that participates in the management of the investment activities of the partnership
• Has income attributable to sources within California other than income from the investment partnership
Then the corporation will be taxable on its distributive share of California source income of the partnership. See R&TC Section 23040.1 for more information.
Specific Line InstructionsEnter the difference between federal and California amounts from column (c) on Schedule CA (540), if you are a resident; or on Schedule CA (540NR), if you are a nonresident. Also, if you are a nonresident, enter California source amounts from the Schedule K-1 (565), column (e), on your Schedule CA (540NR), column E.G(1) – If this box is checked, the partnership is a PTP as defined in IRC Section 469(k)(2). Follow the instructions for form FTB 3801 or form FTB 3802 for reporting income, gains, and losses from PTPs.G(2) – If this box is checked, the partnership is an investment partnership as defined in R&TC Sections 17955 and 23040.1. If you are a nonresident individual, the amounts in column (e) will generally not be taxable in California. See Specific Line Instructions C, Credits, for additional information.Note to Nonresident Partners: The specific line instructions below that instruct you to enter information from Schedule K-1 (565), column (d), on other forms, apply to resident partners. When the instructions make reference to column (d), nonresident partners should take information from columns (c), (d), and (e) and apply the information to the appropriate line relating to computation of total income and income from California sources.
A Income (Loss)Line 1 – Ordinary Income (Loss) from Trade or Business ActivitiesThe amount reported on line 1, column (d), is your share of the ordinary income (loss) from the trade or business activities of the partnership. For
individual partners, where this amount is reported depends on whether or not this amount is a passive activity to you.If, in addition to this passive activity income, you have a passive activity loss from this partnership or from any other source, report the income on form FTB 3801 or form FTB 3802. If a loss is reported on line 1, column (d), report the loss on the applicable line of form FTB 3801 or form FTB 3802 to determine how much of the loss is allowable.If the partnership has income from activities both within and outside California, the amount nonresidents or corporate partners must report on their California returns is a function of the partnership’s apportionment percentage and allocation of income. Reporting instructions are included in the information provided by the partnership. See Cal. Code Regs., tit. 18 sections 17951-4 and 25137-1 for more information. In addition, see General Information E, Unitary Partners.
Line 2 – Net Income (Loss) from Rental Real Estate ActivitiesGenerally, the income (loss) reported on line 2, column (d), is a passive activity amount to all partners. However, the loss limitations of IRC Section 469 do not apply to qualified investors in qualified low-income housing projects. If applicable, the partnership will attach a schedule for line 2 to identify such amounts. If you have an amount on Schedule K-1 (565), line 2, column (c), report the California adjustment on Schedule CA (540 or 540NR), line 17, column B or column C, whichever is applicable.Use the following instructions to determine where to enter the line 2 amount.• If you have a loss on line 2, column (d) (other than a qualified low-
income housing project loss), enter the loss on the applicable line of form FTB 3801 or form FTB 3802 to determine how much of the loss is allowable. Your share of the loss may be eligible for the special $25,000 allowance for rental real estate losses. Get the instructions for form FTB 3801 or form FTB 3802 for more information.
See the federal Schedule K-1 (1065) Specific Instructions for box 2, item 1, and item 2 for more information.Report any California adjustment amount from column (c) on Schedule CA (540 or 540NR) if you are a qualified investor reporting a qualified low-income housing project loss.• If you have only income on line 2, column (d), and no other passive
losses, enter any California adjustment amount from column (c) on Schedule CA (540 or 540NR). However, if in addition to this passive activity income, you have a passive activity loss from this partnership or from any other source, report the line 2, column (d), income on the applicable line of form FTB 3801 or form FTB 3802.
Line 3 – Net Income (Loss) from Other Rental ActivitiesThe amount on line 3, column (d) is a passive activity amount for all partners.• If line 3, column (d) is a loss, report the loss on the applicable line of
form FTB 3801 or form FTB 3802.• If only income is reported on line 3, column (d), and you have no other
passive losses, report the California adjustment from column (c) on Schedule CA (540 or 540NR). However, if in addition to this passive activity income, you have a passive activity loss from this partnership or from any other source, report the line 3 income on the applicable line of form FTB 3801 or form FTB 3802.
Line 4 – Guaranteed Payments to PartnersAmounts on this line are not normally part of a passive activity. If there is an amount on Schedule K-1 (565), line 4, column (c), enter this amount on Schedule CA (540 or 540NR), line 21f, column B or line 21f, column C, whichever is applicable. If this is a passive activity for the partner, then the partner must also complete the passive activity form. Use federal Form 8582, Passive Activity Loss Limitations, for federal purposes and form FTB 3801 for California purposes.
Portfolio Income – Line 5 through Line 11aPortfolio income (loss), referred to as “portfolio” in these instructions, is generally not subject to the passive activity limitations of IRC Section 469. Portfolio income includes interest, dividend, royalty income and gain or loss on the sale of property held for investment. Generally, amounts reported on lines 8, 9, and 11a are gains or losses attributable to the disposition of property held for investment and are, therefore, classified as portfolio income (loss). However, if an amount reported on lines 8, 9, or 11a, column (d), is a passive amount, the partnership should identify the amount.
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Line 5 – Interest IncomeIf you have an amount on Schedule K-1 (565) line 5, column (c), report this amount on Schedule CA (540 or 540NR), line 8, column B or column C, whichever is applicable.
Line 6 – DividendsIf you have an amount on Schedule K-1 (565) line 6, column (c), report this amount on Schedule CA (540 or 540NR), line 9, column B or column C, whichever is applicable.
Line 7 – RoyaltiesIf you have an amount on Schedule K-1 (565), line 7, column (c), report this amount on Schedule CA (540 or 540NR), line 17, column B or column C, whichever is applicable.
Line 8 and Line 9 – Net Short-term and Net Long-term Capital Gain (Loss)If you have an amount on Schedule K-1 (565), line 8 or line 9, column (d), report this amount on Schedule D (540 or 540NR).
Line 10a and Line 10b – Total Gain and Total Loss under IRC Section 1231 (Other Than Due to Casualty or Theft)If the amounts on line 10a and line 10b relate to rental activity, the IRC Section 1231 gain (loss) is a passive activity amount. If the amounts on line 10a and line 10b relate to a trade or business activity and you are a limited partner, the IRC Section 1231 gain (loss) is a passive activity amount.• If the amount is not a passive activity amount report it on Schedule D-1,
line 2, column (g). • If a gain is reported on line 10a, column (d), and it is a passive activity
amount report the gain on Schedule D-1, line 2, column (g).• If a loss is reported on line 10b, column (d), and it is a passive activity
amount, see form FTB 3801 to determine if your loss is limited.
Line 11a – Other Portfolio Income (Loss)The partnership uses line 11a, column (d), to report portfolio income other than interest, dividend, royalty, and capital gain (loss) income. The partnership should attach a schedule to Schedule K-1 (565) to tell you what kind of portfolio income is reported on line 11a, column (d), is from a real estate mortgage investment conduit (REMIC) in which the partnership is a residual interest holder. If the partnership has a residual interest in a REMIC, it will report your share of REMIC taxable income (net loss) on the schedule. Report the adjustment amount from column (c) on Schedule CA (540 or 540NR). The partnership will also report your share of “excess inclusion” and your share of IRC Section 212 expenses. If you itemize your deductions on federal Schedule A (1040), you may deduct these IRC Section 212 expenses as a miscellaneous deduction.
Line 11b and Line 11c – Total Other Income and Total Other LossAmounts reported on these lines are other items of income (loss) not included on line 1 through line 11a. The partnership should give you a description for each of these items.Use the instructions below to:• Report income or gain (not losses) from passive activities• Report income, gain, or losses from all other passive activitiesIf you have losses from passive activities, or a combination of income, gains, and losses from passive activities, you must first complete form FTB 3801 or form FTB 3802 to determine if any of your losses are limited by the passive loss rules. Use the instructions below to report passive income and losses after the passive loss limitations have been computed.Line 11b and line 11c items may include:• Partnership gains from disposition of farm recapture property (get
Schedule D-1) and other items to which IRC Section 1252 applies.• Recoveries of bad debts, prior taxes, and delinquency amounts (IRC
Section 111). Report the amounts from line 11b and line 11c, column (c), on Schedule CA (540 or 540NR), line 21f, column B or column C, whichever is applicable.
• Gains and losses from wagering, IRC Section 165(d). Report the amounts from line 11b and line 11c, column (c), on Schedule CA (540 or 540NR), line 21f, column B or column C, whichever is applicable.
• Any income, gain, or loss to the partnership under IRC Section 751. Report this amount on Schedule D-1, line 10.
• Specially allocated ordinary gain or loss. Report this amount on Schedule D-1, line 10.
• Net gain or loss from involuntary conversions due to casualty or theft. The partnership will give you a schedule that shows the California amounts to be entered on federal Form 4684, Casualties and Thefts, Section B, Part II, line 34, column (b)(i), column (b)(ii), and column (c).
• Eligible gain from the sale or exchange of qualified small business stock (as defined in R&TC Section 18152.5 and issued after August 10, 1993). Also, the name of the corporation that issued the stock and the adjusted basis of that stock should be reported on the attachment to Schedule K (565) and Schedule K-1 (565). Any differences between IRC Section 1202 and R&TC Section 18152.5 should be included on line 11b and line 11c, column (c).
B DeductionsLine 12 – Expense Deduction for Recovery PropertyFor California the maximum amount of expense deduction for recovery property (IRC Section 179 deduction) that you can claim for all sources is $25,000. The $25,000 limit is reduced if the total cost of IRC Section 179 property placed in service during the year exceeds $200,000.Federal limitation amounts are different than California limitation amounts.The partnership will provide information on your share of the IRC Section 179 deduction and of the cost of the partnership’s IRC Section 179 property so that you can compute this limitation. Your IRC Section 179 deduction is also limited to your taxable income from all of your trades or businesses. Get form FTB 3885A, Depreciation and Amortization Adjustments, and get federal Publication 534, Depreciating Property Placed In Service Before 1987, for more information.If the IRC Section 179 deduction is a passive activity amount, report it on the applicable line of form FTB 3801. If it is not a passive activity amount and there is an amount on Schedule K-1 (565), line 12, column (c), enter this amount on Schedule CA (540 or 540NR), line 21f, column B or column C, whichever is applicable.Refer to R&TC Sections 17267.2, 17267.6, and 17268 on how to figure the expense deduction for recovery property in an economic development area.
Line 13a – Charitable ContributionsThe partnership will provide a schedule that shows which contributions were subject to the 50%, 30%, and 20% limitations. See the instructions for federal Form 1040 for more information.California has not conformed to any of the provisions of the Katrina Emergency Disaster Relief Act of 2005.If there is an amount on Schedule K-1 (565), line 13a, column (c), enter this amount on Schedule CA (540 or 540NR), line 41.
Line 13b – Investment Interest ExpenseIf the partnership paid or accrued interest debts it incurred to buy or hold investment property, the amount of interest you can deduct may be limited. For more information and the special provisions that apply to investment interest expense, get form FTB 3526, Investment Interest Expense Deduction, and federal Publication 550, Investment Income and Expenses.Enter the amount from column (d) on form FTB 3526 along with your investment interest expense from any other sources. Form FTB 3526 will help you determine how much of your total investment interest is deductible.
Line 13c – IRC Section 59(e) ExpendituresIf you have an amount on Schedule K-1 (565) line 13c, see the instructions for the federal Schedule K-1 (1065), line 13. The partnership should give you a description and the amount of your share for each item applicable to this category.
Line 13d – Deductions Related to Portfolio IncomeAmounts entered on this line are the deductions that are clearly and directly allocable to portfolio income (other than investment interest expense and expenses from a REMIC). If you have an amount on Schedule K-1 (565), line 13d, column (c), enter this amount on Schedule CA (540 or 540NR), line 41. If any of the line 13d amount should not be reported on Schedule CA (540 or 540NR), the partnership should identify these amounts.
Line 13e – Other DeductionsAmounts on this line are deductions not included on lines 12, 13a, and 13d. If there is an amount on Schedule K-1 (565), line 13e, column (c), enter this amount on the applicable line of Schedule CA (540 or 540NR).
See the instructions for federal Schedule K-1 (1065), line 13, for examples of other deductions. Also, get FTB Pub. 1001, Supplemental Guidelines to California Adjustments, for differences between federal and California tax law for certain deductions.
Line 14The information reported on line 14 of the federal Schedule K-1(1065), does not apply to California and therefore there is no line 14.
C CreditsIf you have credits that are passive activity credits, complete form FTB 3801-CR (use form FTB 3802 for corporations) in addition to the credit forms referenced. Get the instructions for form FTB 3801-CR (or form FTB 3802) for more information.
Line 15a – Total WithholdingTotal Withholding is the sum of your distributive share of taxes withheld from payments to the partnership by another entity (allocated to all partners according to their respective partnership interests) plus taxes withheld-at-source on you as a domestic or foreign nonresident partner. If there is a pass-through withholding credit from another entity or taxes were withheld on you by the partnership, the partnership must provide a completed Form 592-B, Nonresident Withholding Tax Statement. Attach Form 592-B to the front of your California return to claim the amount withheld. Schedule K-1 (565) may not be used to claim the withholding credit. If the partnership is not on a calendar year, the amount on line 15a may not match the amount on Form 592-B because of the difference in accounting periods. The amount shown on Form 592-B should be claimed on one of the following:• Form 540, California Resident Income Tax Return, line 38.• Form 540NR, California Nonresident or Part-Year Resident Income Tax
Return (Long Form), line 44.• Form 541, California Fiduciary Income Tax Return, line 31.• Form 109, California Exempt Organization Business Income Tax Return,
line 22.• Form 100, California Corporation Franchise or Income Tax Return,
line 34.• Form 100S, California S Corporation Franchise or Income Tax Return,
line 33.Get Pub. 1017, Nonresident Withholding Partnership Guidelines,for more information.
Line 15b – Low-Income Housing CreditAny allowable credit is entered on form FTB 3521, Low-Income Housing Credit. The passive activity credit limitations of IRC Section 469, however, may limit the amount of credit. Credits from passive activities are generally limited to tax attributable to passive activities. You cannot claim the low-income housing credit on any qualified low-income housing project for which any person was allowed any benefit under IRC Section 502 of the Tax Reform Act of 1986.
Line 15c – Other Credits Related to Rental Real Estate ActivitiesThe information you need to compute credits related to rental real estate activities other than the low-income housing credit is provided on this line with an attached schedule. These credits may be limited due to passive activity limitation rules.
Line 15d – Credits Related to Other Rental ActivitiesAny information you need to compute credits related to rental activities other than rental real estate activities is provided on this line. These credits may be limited due to passive activity limitation rules.
Line 15e – Nonconsenting Nonresident Member’s Tax Paid by LLC on behalf of your partnership.This line shows any income tax paid on your partnership’s behalf by an LLC if, the general partner in the partnership did not sign form FTB 3832, Limited Liability Company Nonresident Members’ Consent, consenting to California’s jurisdiction to tax the partnership’s distributive share of the LLC income attributable to California sources.You must attach a copy of the Schedule K-1 (568) previously issued to your partnership by the LLC and the Schedule K-1 (565) issued to you by your partnership. You must also attach a copy of Form 592-B received from the withholding LLC to the partnership being withheld upon and the
Form 592-B to the partners by the partnership that was withheld upon, to your California tax return to claim your share of the tax paid by the LLC on your partnership’s behalf.
Line 15f – Other CreditsThis line is used to report information you need to compute pass-through credits and other items that are not includable on 15a through 15d but are related to the trade or business activity. The partnership should provide a schedule and/or statement explaining any items.Credits that may be reported on line 15f (depending on the type of activity they relate to) include:• Community Development Financial Institution Deposits Credit. Use credit
code 209.• Disabled Access Credit for Eligible Small Businesses. Get form FTB 3548.• Donated Agricultural Products Transportation Credit. Get form FTB 3547.• Employer Child Care Program/Contribution Credit. Get form FTB 3501.• Enhanced Oil Recovery Credit. Get form FTB 3546.• Environmental Tax Credit. Get form FTB 3511.• Farmworker Housing Credit-Construction Credit. Use credit code 207.• Farmworker Housing Credit-Loan. Use credit code 208.• Local Agency Military Base Recovery Area (LAMBRA) Hiring and Sales or
Use Tax Credit. Get form FTB 3807.• Manufacturing Enhancement Area (MEA) Hiring Credit. Get form
FTB 3808.• Natural Heritage Preservation Credit. Get form FTB 3503.• Prison Inmate Labor Credit. Get form FTB 3507.• Research Credit. Get form FTB 3523.• Rice Straw Credit. Use credit code 206.• Targeted Tax Area (TTA) Hiring and Sales or Use Tax Credit. Get form
FTB 3809.The passive activity limitations of IRC Section 469 may limit the amount of credits on line 15b, line 15c, line 15d, and line 15f. Line 15b, line 15c, and line 15d credits are related to the rental activities of the partnership. Line 15f credits are related to the trade or business activities of the partnership. In general, passive activity credits from passive activities are limited to tax attributable to passive activities for California purposes (R&TC Section 17561). Credits that may be limited under the passive activity credit rules include the following:• Research credit• Low-income housing creditYou may be able to use the low-income housing credit, and other credits generated from rental activities, against tax on other income. See form FTB 3801-CR for more information.The partnership can include on line 15f your distributive share of net income taxes paid to other states by the partnership. Subject to the limitations of R&TC Section 18006, partners may claim a credit against their individual tax for net income taxes paid by the partnership to another state. The amount of tax paid is required to be supported by a copy of the return filed with the other state and evidence of the payment of the tax. Get Form 540, Schedule S for more information.All of these forms and many others are available on our Website at www.ftb.ca.gov.
Line 16 The information reported on line 16 of the federal Schedule K-1 (1065), does not apply to California and therefore there is no line 16.
D Alternative Minimum Tax (AMT) ItemsLine 17a through Line 17f column (d)Use the information reported on line 17a through line 17f, column (d) as well as your adjustments and tax preference items from other sources to complete Schedule P (540), Alternative Minimum Tax and Credit Limitations — Residents; Schedule P (540NR), Alternative Minimum Tax and Credit Limitations — Nonresidents or Part-Year Residents; Schedule P (541), Alternative Minimum Tax and Credit Limitations — Fiduciaries; Schedule P (100), Alternative Minimum Tax and Credit Limitations — Corporations or Schedule P (100W), Alternative Minimum Tax and Credits Limitations – Water’s-Edge Filers. For additional information, see the instructions for federal Schedule K-1 (1065), Alternative minimum tax (AMT) items box 17.
E Tax-Exempt Income and Nondeductible expensesLine 18a through Line 18c – Tax-exempt Income and Nondeductible ExpensesSee the instructions for federal Schedule K-1 (1065), line 18. The partnership should give you a description and the amount of your share for each item applicable to California in this category.
F DistributionsLine 19a through Line 19b – DistributionsSee the instructions for federal Schedule K-1 (1065), line 19.
G OtherLine 20a through Line 20c – Investment Income, Investment Expenses, and Other InformationIf the partnership paid or accrued interest on debts it incurred to buy or hold investment property, the amount of interest you can deduct may be limited.For more information and the special provisions that apply to investment interest expense, get form FTB 3526, Investment Interest Expense Deduction, and federal Publication 550, Investment Income and Expenses.Use the column (d) amounts to determine the amount to enter on form FTB 3526, line 1.The amounts shown on line 20a and line 20b include only investment income and expenses included on lines 5, 6, 7, 11, and 13d of this Schedule K-1 (565). The partnership should attach a schedule that shows the amount of any investment income and expenses included in any other lines of this Schedule K-1 (565). Use these amounts, if any, to adjust line 20a and line 20b to determine your total investment income and total investment expenses from this partnership.Combine these totals with investment income and expenses from all other sources to determine the amount to enter on form FTB 3526, line 1.For credit recaptures attach a schedule that includes the credit recapture, names, and amounts.
Supplemental InformationThe partnership will provide supplemental information required to be reported to you on this line. If the partnership is claiming tax benefits from an EZ, LARZ, LAMBRA, MEA, or TTA it will give you the business income and business capital gains and losses apportioned to the EZ, LARZ, LAMBRA, MEA, or TTA on this line. Get form FTB 3805Z, FTB 3806, FTB 3807, FTB 3808, or FTB 3809 to claim any applicable credit.The partnership may have provided a schedule with amounts showing your proportionate interest in the partnership’s aggregate gross receipts, less returns and allowances. A qualified taxpayer may exclude income, positive and negative adjustments, and preference items attributable to any trade or business from alternative minimum taxable income. A “qualified taxpayer” means a taxpayer that meets both of the following:• Is the owner of, or has an ownership interest in a trade or business.• Has aggregate gross receipts, less returns and allowances, of less than
$1,000,000 during the taxable year from all trades or businesses in which the taxpayer is an owner or has an ownership interest. In the case of an ownership interest, you should include only your proportional share of aggregate gross receipts of any trade or business from a partnership, limited liability company (LLC), S corporation, regulated investment company (RIC), real estate investment trust (REIT), or real estate mortgage investment conduit (REMIC).
You need to add your share of the aggregate gross receipts from this partnership to your aggregate gross receipts from all other trades or businesses in which you hold an interest to determine if you are a qualified taxpayer.For purposes of R&TC Section 17062(b)(4), “aggregate gross receipts, less returns and allowances” means the sum of the following:• The gross receipts of the trades or businesses which the taxpayer owns.• The proportionate interest of the gross receipts of the trades or
businesses which the taxpayer owns.• The proportional interest of pass-through entities gross receipts in which
the taxpayer holds an interest. “Gross receipts” means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of R&TC Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of R&TC Section 25120.
For purposes of this section, “pass-through entity” means a partnership (as defined by R&TC Section 17008), an S corporation, a RIC, a REIT, and a REMIC. See R&TC Section 17062 for more information.The pro-rata share of gain or loss on property subject to the IRC Section 179 expense deduction recapture should be reported on Schedule K-1 as supplemental information. Follow the instructions on the federal Form 4797 and federal Schedule K-1 (1065) for the reporting requirements.Get FTB Pub. 1001 for a listing of items of nonconformity for individuals.
H Table 1Generally, nonbusiness interest and dividends are sourced to the state of residence for nonapportioning individuals. Nonapportioning means doing business entirely within California. For more information regarding the sourcing of intangibles, see R&TC Section 17952.For apportioning partners, nonbusiness interest and dividends generally are allocable to California if the taxpayer’s commercial domicile is California. For information regarding sourcing of intangibles for apportioning taxpayers, see R&TC Sections 25126 and 25127.The income data contained in Table 1 is not reflected in column (e) of Schedule K-1 (565). For additional information, see General Information E, Unitary Partners.
I Table 2The final determination of unity is made at the partner level.If the partner and the partnership are engaged in a single unitary business or if the partnership is uncertain as to whether it is unitary with the partner, the partnership will furnish the information in Table 2.The partner’s share of the partnership’s business income is entered on Table 2, Part A. The partner then adds that income to its own business income and apportions the combined business income using the revised factor described below.Table 2, Part B reflects the partner’s share of nonbusiness income from real and tangible property wholly sourced or allocable to California. This is added to apportioned business income and nonbusiness intangible income allocated to California and becomes a part of California taxable income. For more information on sourcing intangibles, see R&TC Sections 25124 and 25125, and Cal. Code Regs., tit. 18 sections 17951-1, 17951-2, and 17951-3.The partner’s share of the partnership’s property, payroll, and sales factors is in Table 2, Part C. The partner combines its apportionment factors with the apportionment factors of the partnership and uses the revised factor to compute its business income apportioned to California. For further information, see General Information E, Unitary Partners.
Schedule K-1 (565) Instructions 2007 Page 47
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Form 565 Booklet 2007 Page 49
Form 565Codes for Principal Business ActivityThis list of principal business activities and their associated codes is designed to classify a business by the type of activity in which it is engaged to facilitate the administration of the California Revenue and Taxation Code. For taxable years beginning on or after January 1, 1998, these principal business activity codes are based on the North American Industry Classification System.
Using the list of activities and codes below, determine from which activity the partnership derives the largest percentage of its ‘’total receipts.’’ Total receipts is defined as the sum of gross receipts or sales plus all other income. If the partnership purchases raw materials and supplies them to a subcontractor to produce the finished product, but retains title to the product, the partnership is considered a manufacturer and must use one of the manufacturing codes (311110-339900).
Once the principal business activity is determined, entries must be made on Form 565, Question C. For the business activity code number, enter the six-digit code selected from the list below. On the next line enter a brief description of the partnership’s business activity. Finally, enter a description of the principal product or service of the partnership on the next line.
112900 Other Animal ProductionForestry and Logging113110 Timber Tract Operations113210 Forest Nurseries & Gathering
of Forest Products113310 LoggingFishing, Hunting and Trapping114110 Fishing114210 Hunting & TrappingSupport Activities for Agriculture and Forestry115110 Support Activities for Crop
Production (including cotton ginning, soil preparation, planting, & cultivating)
115210 Support Activities for Animal Production
115310 Support Activities for Forestry
Mining211110 Oil & Gas Extraction212110 Coal Mining212200 Metal Ore Mining212310 Stone Mining & Quarrying212320 Sand, Gravel, Clay, & Ceramic
& RefractoryMinerals Mining & Quarrying212390 Other Nonmetallic Mineral
Mining & Quarrying213110 Support Activities for Mining
Utilities221100 Electric Power Generation,
Transmission & Distribution221210 Natural Gas Distribution221300 Water, Sewage, & Other
Systems221500 Combination Gas & Electric
ConstructionCodeConstruction of Buildings 236110 Residential Building
Construction 236200 Nonresidential Building
Construction Heavy and Civil Engineering Construction 237100 Utility System Construction 237210 Land Subdivision 237310 Highway, Street, & Bridge
Construction 237990 Other Heavy & Civil
Engineering Construction Specialty Trade Contractors 238100 Foundation, Structure, &
Component MfgTransportation Equipment Manufacturing336100 Motor Vehicle Mfg336210 Motor Vehicle Body & Trailer
Mfg336300 Motor Vehicle Parts Mfg336410 Aerospace Product & Parts Mfg336510 Railroad Rolling Stock Mfg336610 Ship & Boat Building336990 Other Transportation
Equipment MfgFurniture and Related Product Manufacturing337000 Furniture & Related Product
ManufacturingMiscellaneous Manufacturing339110 Medical Equipment & Supplies
Mfg339900 Other Miscellaneous
Manufacturing
Wholesale TradeMerchant Wholesalers, Durable Goods 423100 Motor Vehicle & Motor Vehicle
Parts & Supplies 423200 Furniture & Home Furnishings 423300 Lumber & Other Construction
Materials 423400 Professional & Commercial
Equipment & Supplies 423500 Metal & Mineral (except
Retail TradeMotor Vehicle and Parts Dealers441110 New Car Dealers441120 Used Car Dealers441210 Recreational Vehicle Dealers441221 Motorcycle Dealers441222 Boat Dealers441229 All Other Motor Vehicle Dealers441300 Automotive Parts, Accessories,
& Tire StoresFurniture and Home Furnishings Stores442110 Furniture Stores442210 Floor Covering Stores442291 Window Treatment Stores442299 All Other Home Furnishings
StoresElectronics and Appliance Stores443111 Household Appliance Stores443112 Radio, Television, & Other
Electronics Stores443120 Computer & Software Stores443130 Camera & Photographic
Supplies StoresBuilding Material and Garden Equipment and Supplies Dealers444110 Home Centers444120 Paint & Wallpaper Stores444130 Hardware Stores444190 Other Building Material Dealers444200 Lawn & Garden Equipment &
Supplies StoresFood and Beverage Stores445110 Supermarkets and Other
Grocery (except Convenience) Stores
445120 Convenience Stores445210 Meat Markets445220 Fish & Seafood Markets445230 Fruit & Vegetable Markets445291 Baked Goods Stores445292 Confectionery & Nut Stores445299 All Other Specialty Food Stores445310 Beer, Wine, & Liquor StoresHealth and Personal Care Stores446110 Pharmacies & Drug Stores446120 Cosmetics, Beauty Supplies, &
Perfume Stores446130 Optical Goods Stores446190 Other Health & Personal Care
Stores448140 Family Clothing Stores448150 Clothing Accessories Stores448190 Other Clothing Stores448210 Shoe Stores448310 Jewelry Stores448320 Luggage & Leather Goods
StoresSporting Goods, Hobby, Book, and Music Stores451110 Sporting Goods Stores451120 Hobby, Toy, & Game Stores451130 Sewing, Needlework, & Piece
Goods Stores451140 Musical Instrument & Supplies
Stores451211 Book Stores451212 News Dealers & Newsstands451220 Prerecorded Tape, Compact
Disc, & Record StoresGeneral Merchandise Stores452110 Department Stores452900 Other General Merchandise
StoresMiscellaneous Store Retailers453110 Florists453210 Office Supplies & Stationery
Stores453220 Gift, Novelty, & Souvenir Stores453310 Used Merchandise Stores453910 Pet & Pet Supplies Stores453920 Art Dealers453930 Manufactured (Mobile) Home
Order Houses454210 Vending Machine Operators454311 Heating Oil Dealers454312 Liquefied Petroleum Gas
(Bottled Gas) Dealers454319 Other Fuel Dealers454390 Other Direct Selling
Establishments (including door-to-door retailing, frozen food plan providers, party plan merchandisers, & coffee-break service providers)
Transportation and WarehousingAir, Rail, and Water Transportation481000 Air Transportation482110 Rail Transportation483000 Water TransportationTruck Transportation484110 General Freight Trucking, Local484120 General Freight Trucking, Long-
distance484200 Specialized Freight TruckingTransit and Ground Passenger Transportation485110 Urban Transit Systems485210 Interurban & Rural Bus
Transportation485310 Taxi Service485320 Limousine Service485410 School & Employee Bus
Transportation485510 Charter Bus Industry485990 Other Transit & Ground
paging, cellular, satellite, cable & other program distribution, resellers, & other telecommunications)
Internet Service Providers, Web Search Portals, and Data Processing Services 518111 Internet Service Providers 518112 Web Search Portals 518210 Data Processing, Hosting, &
Related Services Other Information Services 519100 Other Information Services
(including news syndicates & libraries)
Finance and InsuranceDepository Credit Intermediation522110 Commercial Banking522120 Savings Institutions522130 Credit Unions522190 Other Depository Credit
524290 Other Insurance Related Activities (including third-party administration of insurance and pension funds)
Funds, Trusts, and Other Financial Vehicles525100 Insurance & Employee Benefit
Funds525910 Open-End Investment Funds
(Form 1120-RIC)525920 Trusts, Estates, & Agency
Accounts525930 Real Estate Investment Trusts
(Form 1120-REIT)525990 Other Financial Vehicles
(including closed-end investments funds)
“Offices of Bank Holding Companies” and “Offices of Other Holding Companies” are located under Management of Companies (Holding Companies) on next page.
Real Estate and Rental and LeasingReal Estate531110 Lessors of Residential
Buildings & Dwellings531114 Cooperative Housing531120 Lessors of Nonresidential
Buildings (except Miniwarehouses)
531130 Lessors of Miniwarehouses & Self-Storage Units
531190 Lessors of Other Real Estate Property
531210 Offices of Real Estate Agents & Brokers
531310 Real Estate Property Managers531320 Offices of Real Estate
Appraisers531390 Other Activities Related to Real
EstateRental and Leasing Services532100 Automotive Equipment Rental
& Leasing532210 Consumer Electronics &
Appliances Rental532220 Formal Wear & Costume
Rental532230 Video Tape & Disc Rental532290 Other Consumer Goods Rental532310 General Rental Centers532400 Commercial & Industrial
Machinery & Equipment Rental & Leasing
Lessors of Nonfinancial Intangible Assets (except copyrighted works)533110 Lessors of Nonfinancial
Intangible Assets (except copyrighted works)
Form 565 Booklet 2007 Page 51
CodeHome Health Care Services621610 Home Health Care Services Other Ambulatory Health Care Services621900 Other Ambulatory Health Care
Services (including ambulance services & blood & organ banks)
Hospitals622000 HospitalsNursing and Residential Care Facilities623000 Nursing & Residential Care
FacilitiesSocial Assistance624100 Individual & Family Services624200 Community Food & Housing,
& Emergency & Other Relief Services
624310 Vocational Rehabilitation Services
624410 Child Day Care Services
Arts, Entertainment, and RecreationPerforming Arts, Spectator Sports, and Related Industries711100 Performing Arts Companies711210 Spectator Sports (including
sports clubs & racetracks)711300 Promoters of Performing Arts,
Sports, & Similar Events711410 Agents & Managers for Artists,
Athletes, Entertainers, & Other Public Figures
711510 Independent Artists, Writers, & Performers
Museums, Historical Sites, and Similar Institutions712100 Museums, Historical Sites, &
Similar InstitutionsAmusement, Gambling, and Recreation Industries713100 Amusement Parks & Arcades713200 Gambling Industries713900 Other Amusement &
812330 Linen & Uniform Supply812910 Pet Care (except Veterinary)
Services812920 Photofinishing812930 Parking Lots & Garages812990 All Other Personal ServicesReligious, Grantmaking, Civic, Professional, and Similar Organizations813000 Religious, Grantmaking,
Civic, Professional, & Similiar Organizations (includng condominium and homeowners associations)
Code
Professional, Scientific, and Technical ServicesLegal Services541110 Offices of Lawyers541190 Other Legal ServicesAccounting, Tax Preparation, Bookkeeping, and Payroll Services541211 Offices of Certified Public
Accountants541213 Tax Preparation Services541214 Payroll Services541219 Other Accounting ServicesArchitectural, Engineering, and Related Services541310 Architectural Services541320 Landscape Architecture
Services541940 Veterinary Services541990 All Other Professional,
Scientific, & Technical Services
Management of Companies (Holding Companies)551111 Offices of Bank Holding Com-
panies551112 Offices of Other Holding
Companies
Administrative and Support and Waste Management and Remediation ServicesAdministrative and Support Services561110 Office Administrative Services561210 Facilities Support Services561300 Employment Services561410 Document Preparation
Services
Code561420 Telephone Call Centers561430 Business Service Centers
(including private mail centers & copy shops)
561440 Collection Agencies561450 Credit Bureaus561490 Other Business Support
Waste Management and Remediation Services562000 Waste Management &
Remediation Services
Educational Services611000 Educational Services
(including schools, colleges, & universities)
Health Care and Social AssistanceOffices of Physicians and Dentists621111 Offices of Physicians (except
mental health specialists)621112 Offices of Physicians, Mental
Health Specialists621210 Offices of DentistsOffices of Other Health Practitioners621310 Offices of Chiropractors621320 Offices of Optometrists621330 Offices of Mental Health
Practitioners (except Physicians)
621340 Offices of Physical, Occupational & Speech Therapists, & Audiologists
621391 Offices of Podiatrists621399 Offices of All Other
Miscellaneous Health Practitioners
Outpatient Care Centers621410 Family Planning Centers621420 Outpatient Mental Health &
Surgical & Emergency Centers621498 All Other Outpatient Care
CentersMedical and Diagnostic Laboratories621510 Medical & Diagnostic
Laboratories
Page 52 Form 565 Booklet 2007
How to Get California Tax InformationAutomated Toll-Free Phone ServiceUse our automated toll-free service to get recorded answers to many of your questions about California taxes and to order current year California business entity tax forms and publications. This service is available in English and Spanish to callers with touch-tone telephones. Have paper and pencil ready to take notes.From within the United States, call . . . . . . . . . . . . . . . . .(800) 338-0505From outside the United States, call . . . . . . . . . . . . . . . (916) 845-6600
(not toll-free)
General Toll-Free Phone ServiceTelephone assistance is available year-round from 7 a.m. until 6 p.m. Monday through Friday except holidays. From within the United States, call . . . . . . . . . . . . . . . . . (800) 852-5711From outside the United States, call . . . . . . . . . . . . . . . . (916) 845-6500
(not toll-free)For federal tax questions Call the IRS at . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (800) 829-1040Assistance for persons with disabilitiesWe comply with the Americans with Disabilities Act (ADA). Persons with hearing or speech impairments please call:TTY/TDD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (800) 822-6268Asistencia bilingüe en españolAsistencia telefónica esta disponible todo el año durante las 7 a.m. y las 6 p.m. lunes a viernes, excepto días festivos.Dentro de los Estados Unidos, llame al. . . . . . . . . . . . . . (800) 852-5711Fuera de los Estados Unidos, llame a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (916) 845-6500
Asistencia para personas discapacitadas: Nosotros estamos en conformidad con el Acta de Americanos Discapacitados. Personas con problemas auditivos o de habla, pueden llamar al (800) 822-6268 con un aparato de telecomunicación TTY/TDD.
LettersIf you write to us, be sure your letter includes your federal employer identification number (FEIN), SOS file number, your daytime and evening telephone numbers, and a copy of the notice. Send your letter to: FRANCHISE TAX BOARD
PO BOX 942857 SACRAMENTO CA 94257-0640
We will respond to your letter within ten weeks. In some cases, we may need to call you for additional information. Do not attach your letter to your California return.
Where to Get Tax Forms and PublicationsBy Internet – You can download, view, and print California tax forms and publications from our Website at www.ftb.ca.gov.Our Joint Agency Website offers California business tax information and forms for the BOE, EDD, FTB, and IRS at www.taxes.ca.gov.You can also download, view, and print federal forms and publications from the IRS Website at www.irs.gov.By phone – Call our automated toll-free phone number, listed to the left, and follow the recorded instructions. By mail – Please allow two weeks to receive your order. If you live outside California, please allow three weeks to receive your order. Write to: TAX FORMS REQUEST UNIT
FRANCHISE TAX BOARD PO BOX 307 RANCHO CORDOVA CA 95741-0307
In person – Many post offices and libraries provide free California tax booklets during the filing season. Most libraries have forms and schedules to photocopy (a nominal fee may apply).Employees at libraries and post offices cannot provide tax information or assistance.
Your Rights As A TaxpayerFTB’s goals include making certain that your rights are protected so that you have the highest confidence in the integrity, efficiency, and fairness of our state tax system. FTB Pub. 4058 California Taxpayers’ Bill of Rights, includes information on your rights as a California taxpayer, the Taxpayers’ Rights Advocate Program, and how you request written advice from the FTB on whether a particular transaction is taxable. See “Where To Get Income Tax Forms and Publications,” on this page.
